Orange County Housing Report
April 29, 2010

At the stroke of midnight on April 30th the Federal first time home buyer tax credit will come to an end, but it doesn't appear that it will spell the end of demand. Everybody has been looking to the end of the tax credit as if it were likened to the infamous Y2K predictions of a little more than decade ago. Remember those days? I had a neighbor who bought a trash can from the local hardware store and filled it with bottled water and canned goods claiming that the end of life as we knew it was upon us. Governments, banks, power companies, airports, traffic systems and more were all supposed to fail on the first day of the year 2000. Nothing really happened. For Orange County real estate, the end of the tax credit is not going to have much of an impact either. Don't get me wrong; all of the government stimulus has definitely had a profound impact of the real estate market even in our own backyard; however, it is time to move on. The program has to end sometime and the Spring market is the best time to end it. It is true that many first time home buyers are in a hurry to cash in on the credits, but most of the first time home buyers that will be unsuccessful in obtaining the credit, will none-the-less want to take advantage of the lower prices and low interest rates. Recently, many buyers have viewed the credit as as a nice to have perk, and realized that the chances of meeting the deadlines have become mimimal at best. The new California tax credit that starts this Monday is only going to last about a week due to the fact that only 17,500 first time home buyers in ALL of California will obtain the $10,000 credit (spread over three years) before the funds runs out. When California announced the credit about a month ago, demand was already hot. It appears that the California tax credit will not have the time to instigate more demand. The problem has been not enough supply in the lower ranges where first time home buyer activity is the greatest, not a lack of demand. Also, first time home buyer activity has been been steady at about 25% of total activity. It is not going to drop significantly and there are plenty of non-first time home buyers in the marketplace as well.

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Buyers are motivated to purchase knowing that the expected rise in interest rates will ultimately make their payments go up. But, it is more than that. As interest rates rise, buyers can afford less of a home. For example, for a buyer with an income of $100,000 and who has a 20% down payment, a rise in interest rates from 5% to 6% will equate to a decrease in home affordability from $590,000 to $540,000, a $50,000 drop. With the government no longer committing to purchasing pools of loans, a program which ended on March 31st, interest rates are expected to rise a full percent over the coming year.

Demand, the number of new pending sales over the prior month, increased by 231 homes over the prior two weeks and now totals 3,979, a 3% increase and the height thus far in 2010. Demand is 347 pending sales stronger than last year at this time and 1,439 stronger than two years ago. If demand follows a normal cycle this year, it should hit a plateau through the remainder of the Spring market.

Over the past two weeks, the inventory has increased by 231 homes to 9,351, a 2% increase. We started the year at 7,165 listings and have added 2,186 homes to the active inventory to date. Last year, the inventory continued to drop from mid-March to the New Year. The increase seems gradual, but when looked at since the beginning of the year, a 31% increase is pretty profound. Agents in the trenches are stating that there are more unrealistic sellers placing overpriced homes on the market, a by-product of media reports of a 10 - 12 percent rise in the median price of homes in Orange County. Prior to the start of the year I forecasted that the discretionary (equity) seller would return; however, if more and more homes are placed on the market at unrealistic values, the inventory will continue to rise no matter what the demand is. Worse, a rise in inventory for this reason could dampen demand. This is a trend that we will have to continue to watch. If you are a homeowner contemplating placing your home on the market much higher than the most recent comparable sales and pending activity, the current market will not support your line of thinking. Buyers are not willing to pay a sizeable sum extra for a home simply because there is more demand and more competition, and even if they would, the appraisals will not support the sales price. There is just too much distress that remains in the market and the distressed market is keeping a lid on appreciation.

The expected market time for all of Orange County dropped slightly from 2.45 months two weeks ago to 2.35 months today. There still are two distinct markets: homes priced below $1 million, HOT, and homes priced above $1 million COLD. It is important to note that the lower the range, the HOTTER the market. For homes priced below $500,000, the hottest range, the expected market time is 1.6 months. Compare that to homes priced above $4 million where the expected market time is a frigid 29.5 months.

The number of active distressed homes on the market, all short sales and foreclosed properties combined, increased by only 9 homes in the past two weeks and now total 2,790, or 29.8% of the current active inventory. Last year at this time, there were 3,724 distressed homes on the market, representing 35.9% of the active inventory. The number of foreclosed properties that are within the active listing inventory have increased by 38 homes in the past two weeks from 416 to 454. The expected market time for foreclosed properties is 1.12 months, an extremely HOT seller's market. Short sales, where a homeowner attempts to sell a home for less than the total outstanding loans against a home, requiring lender approval, decreased by 29 homes over the past two weeks and now total 2,336. The expected market time for short sales is 1.53 months, also a HOT seller's market. Everybody's looking for a deal, so there's a lot of competition when purchasing a foreclosed home or short sale.

I am still scratching my head trying to understand why California approved $100 million towards a first time homebuyer tax credit. This tax credit is for transactions that close escrow on or after May 1, 2010. The $10,000 credit is spread out over three years. So, when will the $100 million run out? For every buyer, the state is counting $5,700 against the $100 million. This equates to 17,543 first time home buyers. Based upon the current first time home buyer activity, the credit is forecasted to last less than two weeks. And, depending on the number of buyers that have an escrow that is supposed to close at the end of this month but instead are delayed to close after May 1st, the credit may end even sooner.

Source: Steven Thomas, President, Altera Real Estate