Housing demand has skyrocketed due to historically low

rates that are not going anywhere anytime soon.

The Impact of Low Rates: A buyer’s purchasing power has dramatically improved thanks to ultra-low mortgage rates.

Attending an air show for the first time is quite an experience, especially when fighter jets take off and rocket across the sky. The blast from the engines is deafening, the orange glow from the afterburners is visible from the ground, and the powerful vibrations can be felt coursing through a spectator’s body. It is the specially designed jet fuel that allows these aircrafts to soar through the air.

Housing has “specially designed jet fuel,” also known as ultra-low mortgage rates, that is allowing the market to soar in 2020. These historically low rates are not going to budge much from the mid-3’s. And, the recent news of the coronavirus has driven mortgage rates lower over the past month.

The Orange County housing market is extremely hot, and as the year unfolds the heat continues to crank higher and higher. The slower markets of 2018 and the first half of 2019 now seem like a distant mirage to most buyers. For a minute, buyers looked as if they were finally going to get a turn, but that all disappeared. In 2020 housing is sizzling hot again.

To understand where this heightened demand and buyer’s exuberance is coming from it is necessary to consider where interest rates have historically been and their impact on affordability. The chart below highlights how higher interest rates limit the price of a home that a buyer can afford. In 1980, the average mortgage rate was 13.75%. For a desired monthly payment of $3,000 per month with 20% down, a buyer back then was looking at a $338,750 home. Rates continued to drop decade after decade. In 2000, the 8% mortgage allowed a buyer to look at purchasing a $511,250 home. It increased to a $602,500 home just prior to the Great Recession. Flash forward to today’s 3.5% mortgage rate and that buyer desiring a $3,000 per month payment is now looking at an $835,000 home.

Naysayers may quickly point out that the median sales price was much lower back in 1980, 1990, 2000, and 2010; however, taking into consideration both the median income and median price illustrates how buyers are able to afford so much more today. In 1980, the payment for the median priced home as a percentage of income was 55%. In 1990 it was 50%, and in 2000 it was 40%. Just prior to the Great Recession, the monthly mortgage payment was 59% of income. Today, the monthly payment based upon the average rate and median income is at 38%, the same as 2010.

Today’s low mortgage rate is the jet fuel propelling housing upward. As a result, the Expected Market Time, the time from pounding in the FOR-SALE sign to opening escrow down the road, has dropped to levels not seen since July 2013. That is a direct result of supply and demand.

No surprise, the supply of homes available to purchase today, the active listing inventory, is also at its lowest level at this time of the year since 2013, totaling 4,030 homes. Since January 1, the inventory has only grown by 3%. Demand, the last 30-days of pending sales, has skyrocketed from 1,434 to 2,479 pending sales, a 73% increase. The Expected Market Time dropped from 82-days at the start of the year to 49-days today. Anything below 60-days is considered a HOT Seller’s Market.

Advice to Buyers: the low rate environment has significantly improved affordability and allows buyers to stretch their purchasing power to historically high levels. There is not enough emphasis on the importance of the payment of a home; instead, way too much weight is placed on the price.

Advise to Sellers: do not read between the lines of the current hot market as an excuse to overprice. Just as in prior hot markets, many sellers will not find success simply because they stretch the asking price out of bounds. The Fair Market Value of a home is based upon its condition, upgrades, and location. Pricing at or very close to this value allows sellers to obtain the highest sales price.

Active Inventory: The current active inventory increased by 25 homes in the past two-weeks.

The active listing inventory increased by 25 homes in the past two-weeks, up 1%, and now sits at 4,030. Homes are flying off the market nearly as fast as they are coming on. As housing moves deeper into the Spring Market, it will be interesting to see how much the active inventory will grow in the coming months given the insatiable appetite of buyer demand driven by low mortgage rates.

Last year at this time, there were 6,294 homes on the market, 2,264 more than today, a 56% difference. Buyers had a lot more choices and were not tripping over themselves like they are today.

Demand: In the past two-weeks demand climbed by an additional 14%.

Demand, the number of new pending sales over the prior month, increased from 2,173 to 2,479, an additional 306 pending sales, up 14%. Demand will continue to rise as more and more homes come on the market over the course of the next couple of months. The increased volume of homes coming on the market will be more opportunities for buyers to purchase. As a result, demand will climb.

Last year, there were 391 fewer pending sales than today, 16% less.

In the past two-weeks the Expected Market Time dropped from 55 to 49 days, a HOT Seller’s Market (less than 60 days), where home values are appreciating, and sellers get to call the shots during the negotiating process. It is the lowest reading since July 2013. Last year the Expected Market Time was at 90 days, much different than today.

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

In the past two-weeks, demand for homes above $1.25 million increased by 28 pending sales, up 8%, and now totals 398. The luxury home inventory increased by 53 homes, up 3%, and now totals 1,600. With demand climbing faster than the luxury inventory, the overall Expected Market Time for homes priced above $1.25 million dropped from 125 to 121 days in the past couple of weeks.

Year over year, luxury demand is up by 114 pending sales, or 40%, and the active luxury listing inventory is down by 337 homes, or 17%. The Expected Market Time last year was at 205 days, noticeably slower than today.

For homes priced between $1.25 million and $1.5 million, in the past two-weeks, the Expected Market Time increased from 63 to 77 days. For homes priced between $1.5 million and $2 million, the Expected Market Time decreased from 117 to 92 days. For homes priced between $2 million and $4 million, the Expected Market Time decreased from 143 to 134 days. For homes priced above $4 million, the Expected Market Time decreased from 391 to 363 days. At 363 days, a seller would be looking at placing their home into escrow around February 2021.

Orange County Housing Market Summary:

  • The active listing inventory increased by 25 homes in the past two-weeks, up 1%, and now totals 4,030. Last year, there were 6,294 homes on the market, 2,264 more than today, or an extra 56%.
  • Demand, the number of pending sales over the prior month, increased by 306 pending sales in the past two-weeks, up 14%, and now totals 2,479. Last year, there were 2,088 pending sales, 16% fewer than today.
  • The Expected Market Time for all of Orange County decreased from 55 days to 49, a hot Seller’s Market (less than 60 days) and the lowest level since July 2013. It was at 90 days last year, substantially slower 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 32 days. This range represents 34% of the active inventory and 52% of demand.
  • For homes priced between $750,000 and $1 million, the expected market time is 35 days, also a hot Seller’s Market. This range represents 17% of the active inventory and 23% of demand.
  • For homes priced between $1 million to $1.25 million, the expected market time is 55 days, a hot Seller’s Market.
  • For luxury homes priced between $1.25 million and $1.5 million, in the past two weeks, the Expected Market Time increased from 63 to 77 days. For homes priced between $1.5 million and $2 million, the Expected Market Time decreased from 117 to 92 days. For luxury homes priced between $2 million and $4 million, the Expected Market Time decreased from 143 to 134 days. For luxury homes priced above $4 million, the Expected Market Time decreased from 391 to 363 days.
  • The luxury end, all homes above $1.25 million, accounts for 40% of the inventory and only 16% of demand.
  • Distressed homes, both short sales and foreclosures combined, made up only 0.8% of all listings and 1.4% of demand. There are only 15 foreclosure s and 19 short sales available to purchase today in all of Orange County, 34 total distressed homes on the active market, down 4 from two-weeks ago. Last year there were 58 total distressed homes on the market, slightly more than today.
  • There were 1,817 closed residential resales in January, 25% more than January 2019’s 1,458 closed sales. January marked a 26% drop compared to December 2019. The sales to list price ratio was 96.84% for all of Orange County. Foreclosures accounted for just 0.7% of all closed sales, and short sales accounted for 0.2%. That means that 99.1% of all sales were good ol’ fashioned sellers with equity.