Don’t Miss Out

Don’t Miss Out

It is time to get off the fence before values rise and while mortgage rates are so low.

Cost to Waiting: Housing is poised to get hotter next year, setting the stage for appreciation.

Disneyland is known as “The Happiest Place on Earth.” Yet, sometimes the amusement park can be so crowded. The lines for Space Mountain are often the longest. So many people take a look at the length of the line and turn around claiming that they will try to wait for the perfect time. They rationalize that the evening will be much better after a ton of families with little kids leave for the day. To their dismay, after returning to check the line in the evening, the line has not changed. In fact, it is a little bit longer. Was it because of the warm evening? Did all these people in line try to time the line too?

Many buyers are trying to time the housing market. They too are trying to wait for the “perfect time.” They hear that the real estate market is doomed, that housing is on the verge of a bubble, or how the next downturn will be worse than the Great Recession. These buyers are sitting on the fence and are waiting for it to be there turn. It is inevitable, right? Unfortunately, all the noise, is just that… noise. The facts and data simply paint a completely different picture.

It has been frustrating being a buyer. From 2012 through the first half of 2018, everybody was acutely aware that there was a supply problem. That changed last year when the active inventory ballooned from August through Thanksgiving. There was finally a lot more supply, but it was only due to a demand problem. Demand dropped as mortgage rates climbed all the way to 5% in November. Everybody thought it was the beginning to the end of housing’s 6-year run-up.

But that was then, and this is now. Mortgage rates today are at 3.75%. This year has been all about recovering from the sting of high interest rates and low demand. Rates continuously dropped and bottomed at 3.5% in September. They had plunged by 1.5% in such a short period of time. It was unprecedented.

As a result of the current low interest rate environment, housing has transitioned from a slight Buyer’s Market at the beginning of the year, to a Balanced Market in February, to a slight Seller’s Market ever since. In fact, the market has been picking up steam and the Expected Market Time (time from originally listing to opening escrow) just dropped to its lowest level of the year. Regardless of the time of year, housing is heating up with the active inventory dropping like a rock and demand remaining relatively flat.

Since the end of July, the active listing inventory has shed 2,067 homes, a 27% drop. That’s the largest decline since 2012. At the same time, demand (last 30-days of pending sales) has only dropped by 7%. It has not looked that good since 2011. Consequently, the Expected Market Time dropped from 91 days at the end of July to 71 days today, a slight Seller’s Market (from 60 to 90 days), which is when there is not a lot of appreciation and sellers get to call more of the shots during negotiations. Housing is knocking on the door of a HOT Seller’s Market (less than 60 days) where there are multiple offers and home values appreciate.

While it may be frustrating for buyers to hear that the supply problem is back and the market is getting hotter, these frustrations can be overcome by focusing on the payment and diving into the market now before it heats up further. A $700,000 mortgage has a monthly payment of $3,242 today. For perspective, that same payment last year was $3,758 with a 5% rate, an eye-opening $516 extra every single month. But, let’s take it a step further. With a supply problem in 2020 coupled with low mortgage rates, home values are forecasted to appreciate between 2 to 4%. Even if rates remain the same, at 4% appreciation, that $700,000 mortgage would become $728,000 and the monthly payment would be $3,371, that’s an additional $129 per month or $1,548 annually.

What if rates grew to 4.25%? A mortgage rate of 4.25% would still be a great rate and would not rock the housing boat much at all. With 4% appreciation and a rate that is a half percent higher, the monthly mortgage payment would be $3,581 per month. That is an additional $339 per month or $4,068 annually.

For housing, there is often a cost to waiting. Looking back longingly at where values were in the past is an exercise in futility. There is no way to turn back the clock. Instead, looking at where housing is today and where it is headed next year, it makes sense for buyers that have been waiting on the sidelines to get off the fence and into a home. Payments look incredible when factoring in the current low mortgage rate environment.

Active Inventory: The current active inventory dropped by 7% in the past two-weeks, its largest drop of the year.

In the past two-weeks, the active listing inventory shed 387 homes, down 7%, and now totals 5,534, dropping to its lowest level of the year. The last time the inventory was this low was May 2018. It was the second largest drop of the year. The inventory has shed 878 homes in just four weeks, down 14%. The inventory will continue to drop for the remainder of the year and will pick up steam after Thanksgiving, the start to the Holiday Market.

Last year at this time, there were 7,218 homes on the market, 1,684 more than today, or a 30% difference. The inventory is MUCH different than last year when it continued to rise through Thanksgiving.

Demand: In the past two-weeks, demand increased by 2%. 

Demand, the number of new pending sales over the prior month, increased by 53 pending sales in the past two-weeks, a 2% rise, and now sits at 2,328. That’s four weeks in a row of increasing demand. The last time that occurred was in 2016, paving the way for a solid end of the year in terms of closed sales. Expect the same increase in closed sales in December to occur this year. After Thanksgiving, expect demand to drop significantly along with the inventory.

Last year, there were 552 fewer pending sales than today, 24% less.

In the past two-weeks the Expected Market Time significantly dropped from 78 days to 71, a slight Seller’s Market (60 to 90 days), where home values are only appreciating slightly, and sellers get to call more of the shots during the negotiating process. 71 days is the lowest level of the year. The last time that the lowest level was achieved towards the end of the year was in 2012, the initial year of the housing run. Last year, the Expected Market Time was at 122 days and climbing, completely different than today.

Luxury End:  The luxury market improved significantly in the past two-weeks.

In the past two-weeks, demand for homes above $1.25 million increased by 21 pending sales, a 7% rise, and now totals 328. The luxury home inventory decreased by 111 homes and now totals 1,979, down 5%. With increasing demand and a dropping luxury inventory, the overall Expected Market Time for homes priced above $1.25 million decreased from 204 days to 181 over the past two-weeks, a considerable improvement. It was at 230 days a month ago.

Year over year, luxury demand is up by 94 pending sales, or 40%, and the active luxury listing inventory is down by 149 homes, or 7%. The Expected Market Time last year was at 273 days and climbing, much slower than today.

For homes priced between $1.25 million and $1.5 million, in the past two-weeks, the Expected Market Time decreased from 93 to 79 days. For homes priced between $1.5 million and $2 million, the Expected Market Time decreased from 159 to 127 days. For homes priced between $2 million and $4 million, the Expected Market Time decreased from 317 to 304 days. For homes priced above $4 million, the Expected Market Time decreased from 825 to 609 days. At 825 days, a seller would be looking at placing their home into escrow around June 2021.

Orange County Housing Market Summary:

  • The active listing inventory decreased by 387 homes in the past two-weeks, down 7%, and now totals 5,534, its lowest level since May 2018. Last year, there were 7,218 homes on the market, 1,684 more than today, or an extra 30%.
  • Demand, the number of pending sales over the prior month, increased by 53 pending sales in the past two-weeks, up 2%, and now totals 2,328. Last year, there were 1,776 pending sales, 24% fewer than today.
  • The Expected Market Time for all of Orange County dropped from 78 days to 71, a slight Seller’s Market (between 60 to 90 days). It was at 122 days last year and climbing, completely different than today.
  • For homes priced below $750,000, the market is a hot Seller’s Market (less than 60 days) with an expected market time of 48 days. This range represents 38% of the active inventory and 56% of demand.
  • For homes priced between $750,000 and $1 million, the expected market time is 58 days, also a hot Seller’s Market. This range represents 18% of the active inventory and 22% of demand.
  • For homes priced between $1 million to $1.25 million, the expected market time is 81 days, a slight Seller’s Market.
  • For luxury homes priced between $1.25 million and $1.5 million, in the past two weeks, the Expected Market Time decreased from 93 to 79 days. For homes priced between $1.5 million and $2 million, the Expected Market Time decreased from 159 to 127 days. For luxury homes priced between $2 million and $4 million, the Expected Market Time increased from 317 to 304 days. For luxury homes priced above $4 million, the Expected Market Time increased from 825 to 609 days.
  • The luxury end, all homes above $1.25 million, accounts for 35% of the inventory and only 14% of demand.
  • Distressed homes, both short sales and foreclosures combined, made up only 1% of all listings and 1.4% of demand. There are only 23 foreclosures and 31 short sales available to purchase today in all of Orange County, 54 total distressed homes on the active market, identical to two weeks ago. Last year there were 78 total distressed homes on the market, slightly more than today.

There were 2,582 closed residential resales in October, 11% more than October 2018’s 2,334 closed sales. September marked a 1% increase compared to September 2019. The sales to list price ratio was 97.3% for all of Orange County. Foreclosures accounted for just 0.5% of all closed sales, and short sales accounted for 0.5%. That means that 99% of all sales were good ol’ fashioned sellers with equity.

Report courtesy of Steven Thomas Reports on Housing. Information deemed reliable but not guaranteed.