Orange County Housing Report
May 13, 2010

Housing Demand: B+ Current housing demand has reached 2005 levels, just before the turn in the housing market. Demand, the number of new pending sales over the prior month, decreased by 209 homes over the prior two weeks and now totals 3,770, a 5% drop. But, two weeks ago there was a rush to place homes in escrow to take advantage of the first time home buyer tax credit. The credit required a buyer to enter into a binding contract by April 30, 2010. There is sure to be a similar blip in closed sales at the end of June because the credit requires that the buyer close by June 30, 2010. Over the past month, demand has actually increased by 22 homes. Demand is currently really strong for homes priced below $1 million. It is improving for homes priced above $1 million, but the higher the price, the slower the market.

Subscribe to the Orange County Housing Report as part of REALTOR® Tony Dove's newsletter. For more real estate news and commentary, visit: Inman News Tony Dove's Local Realty Digest

Over the past two weeks, the inventory has increased by 205 homes to 9,556, a 2% increase. We started the year at 7,165 listings and have added 2,391 homes to the active inventory to date. That's a 33% increase. The word in the trenches is that there are more and more homeowners who are placing their homes on the market at unrealistic prices. The market is great in the lower ranges, but buyers are not ready to pay a premium over most recent comparable sales. Buyers do not want to overpay for a property and are very focused on price. A hotter market does not translate to a willingness to pay 5% more for a home. There is a lot of competition and multiple offers generated on homes that are priced right. The lower ranges may have hit a bottom in terms of value, but there are still a high number of distressed homes that are keeping a lid on real appreciation. With the direction of the economy still in flux and plenty of homeowners in distress, buyers are carefully approaching the market. 50% of all current active listings below $500,000 are distressed, either short sales or foreclosed properties. The below $500,000 price range represents 43% of the entire active inventory and 63% of demand, the hottest price range. At the beginning of the year, I forecasted a continued return of the discretionary equity seller. These are realistic homeowners that know better than to test the market. We are not there yet. The inventory increased in 2006 and 2007, the first two years of the current downturn, due, in large part, to unrealistic sellers. Then in 2008 and 2009, the unrealistic sellers withdrew their homes from the market, and the discretionary equity seller began to re-emerged, resulting in a slow drop in the active inventory from over 15,000 homes on the market to a little over 7,000. Unfortunately, with news reports of an increase in median prices, it appears that more and more unrealistic sellers are deciding to test the market, once again. The inventory may not be increasing at the same rate as 2006 and 2007, but a 33% increase thus far this year is not healthy for the long term stabilization of the Orange County housing market. NEWSFLASH FOR SELLERS: the market is HOT but is NOT appreciating; so, if you are overpriced, do everybody a favor and reduce your price or pull your home off the market immediately.

There is nothing more frustrating than working with short sales in today's market. The name should be changed to "uncertain" sales and there is nothing "short" about short sales. Short sales are where a homeowner's total loan obligation exceeds the current market value, which requires the lender, or very often lenders, to approve taking less than a full payoff. This process can take anywhere from a few weeks to months. Some short sales are grossly underpriced and receive multiple offers above the list price. Yet, the final agreed upon price may still be too low, jeopardizing the lender's approval of a short sale. In a short sale, there are three approvals that need to take place. First, the buyer must qualify to purchase the home. Second, the seller must have a true hardship, no money secretly tucked away, in order to qualify for a short sale. Last, the home must appraise for close to the agreed upon price between the buyer and the seller. A lender is not in a rush to accept a short sale payoff where the home is selling for $25,000 below the real market price. There are so many obstacles to putting a short sale together, it will make your head spin. Outstanding homeowner association dues, outstanding property tax payments, collection agencies, attorneys, first trust deed holders, second trust deed holders, all potentially stand in the way to closing a short sale. There are currently 4,311 short sales that are pending, 57% of all pending activity. Yet, only 627 short sales closed last month. At that rate, it will take about seven months to deplete just the short sale pending activity. There are still an additional 2,415 current active short sales that need to be absorbed as well. The expected market time for all short sales is a sizzling 1.73 months. Short sales are hot, but are a nightmare because of their uncertainty. Pack your patience in dealing with short sales, you will need it. The short sale process is improving, but at a snail's pace. Last month's total closed short sales is the best total closed for a month since this downturn began, but there is a lot of room for improvement.

Foreclosed properties are one of the hottest segments of the Orange County housing market. The current expected market time is 1.26 months. Ask any buyer that has come across a foreclosed property during their home search and they will tell you that the competition is off the charts. Contrary to popular belief, foreclosed properties do not plague the market. On the contrary, short sales are king and they dominate. There are only 479 total active foreclosed properties on the market in Orange County, representing only 5% of the total active inventory. Demand for foreclosed properties is at 379 pending sales, representing 10% of all demand.

The lower price ranges have realized a considerable drop in value laying the foundation for the return of first time home buyers and investors. The market may be still working its way through a seemingly endless supply of distressed homes, but at least it is functioning correctly. The expected market time for all homes priced below $1 million is an astonishing 2.12 months, a seller's market. I hear over and over how buyers that enter the market are just flabbergasted at the level of competition and the difficulty in purchasing. Prices have already dropped substantially, rates are excellent, and affordability has improved dramatically, all key ingredients fueling the current robust activity. A bottom in the lower ranges has probably been reached.

The upper ranges have improved a bit this year, but going from no activity to a little activity is easy to do. The expected market time is currently at 7.53 months, a buyer's market, but not nearly as slow as the 11.76 month expected market time at the beginning of the year. Part of the improvement can be attributed to the upper ranges catching up to the lower ranges in rate of depreciation, as sellers lower their asking price in order to procure a sale. This uptick in activity in the upper price ranges is also a primary reason for the recent increase in median prices, as opposed to actual appreciation. Buyers are very price conscious in the upper ranges. Nobody is willing to overpay. A bottom has not yet been reached in the upper ranges as prices are a bit stickier and have been slow to drop. A bottom could be reached by the end of this year.

Source: Steven Thomas, President, Altera Real Estate