Orange County Housing Report
May 28, 2010

Could it be graduations, the end of the tax credit, Europe's influence, or the roller coaster stock market causing a temporary housing lull? Only time will tell, but the Orange County housing market has slowed considerably. Housing Demand: Over the past month, housing demand has dropped by 17%. Demand, the number of new pending sales over the prior month, decreased by 676 pending sales. This decrease could be partly artificial. Some of the homes that became pending sales in April, may have more naturally become pending sales in May if the federal tax credits had not come to an end on April 30. As well, cyclically, there is a small lull in the market due to the graduation season, but never to this level. There has been so much attention paid to the European debt crisis, and the effect it is having on global stock markets, that buyers could be waiting for more clarity in economic forecasts. Current forecast are all over the board. The decrease in demand has affected every price range. However, because of the lack of financable inventory in the lower price ranges, competetion in these ranges is still incredibly hot. Homes priced below $1 million have an expected market time of 2.52 months. This is an increase from 2.12 months a couple of weeks ago, but still a deep seller's market. Buyers can expect to continue to compete with multiple offers. The upper price ranges - homes priced above $1 million - have an expected market time of 8.19 months. The higher the price range, the slower the market.

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Thus far this year, the active inventory has increased from 7,165 homes to 9,839 homes today, a 37% increase. In just the past couple of weeks the inventory has risen by 283 homes, a 3% increase. This is partially due to a slowing in demand, but it also has a lot to do with equity sellers testing the market by placing a home they don't need to sell on the market at unrealistic prices. The 2006 and 2007 housing markets were plagued with unrealistically priced inventory. In 2008 and 2009, after unsuccessfully attempting to sell their homes priced well above the then most recent comparable and pending sales, these sellers removed their homes from the market. During the 2008 and 2009 housing markets, homeowners came to understand that the market was difficult and success could only be achieved by carefully pricing a home that needed to be sold. Initially, we believed that realistic, discretionary equity sellers would return to the marketplace in 2010. Unfortunately though, with more and more homeowners testing the market, the opposite will be true. Realistic equity sellers know that "testing the market" has an effect on the market opposite of that which is desired. Buyers begin to sideline themselves, as the glut of overpriced inventory grows, ultimately creating a new depreciation spiral. This situation can be partially attributed to the media's reporting of Orange County's increase in the median sales price this year.

However, the real problem is that the increase in median prices is being misunderstood. The median sales price has increased because more sales are taking place in the upper ranges, not because the value of homes is appreciating by any significant amount. This is due to a thawing in jumbo loan financing and more distressed homes in the upper ranges spurring demand. Homeowners are being confused by reports of countywide median price increases and very hot demand. But current buyers are not ready to pay more than the most recent sale, nor should they. They are very price conscious, especially with an economic climate still very difficult to discern. NEWSFLASH FOR SELLERS: the market is HOT but it is NOT APPRECIATING; so, if you are overpriced, it is advisable to reduce your price or pull your home off the market.

Like the total active listing inventory, the distressed inventory has slowly increased from 2,555 total foreclosed properties and short sales at the beginning of the year to 2,991 today, a 17% increase. Not quite the 37% increase of the total inventory, but, none-the-less, significant. Foreclosed properties have increased from 375 at the beinning of the year to 533 today, a 42% increase. Short sales have increased from 2,180 to 2,458, a 13% increase. There have been more foreclosed properties placed on the market so far this year. However, it appears that some of the banks are also testing the market by placing some of their foreclosed homes on the market at unrealistic prices, and these too are not moving. Do not get me wrong, distressed sales are still in very high demand. It's like going from 105 degree temperatures to 95 degrees, still HOT. The number of active distressed homes on the market, all short sales and foreclosed properties combined, increased by 97 homes in the past two weeks and now total 2,991, or 30.3% of the current active inventory. The total number of foreclosed properties available for sale within the active listing inventory has increased by 54 homes in the past two weeks from 479 to 533. The expected market time for foreclosed properties is 1.58 months, an extreme seller's market. Short sales, where a homeowner attempts to sell a home for less than the total outstanding loans against a home, which requires lender approval, increased by 43 homes over the past two weeks and now total 2,458. The expected market time for short sales is 1.97 months, also an extreme seller's market. Everybody is still looking for a deal, so there's a lot of competition when purchasing distressed homes.

Interest rates were forecasted to start to climb after the Federal government stopped purchasing pools of loans in April, but the increase has not occurred thus far. This has a lot to do with the unexpected European financial debt crisis. International investing has turned to purchasing United States Treasury Bonds. When this happens, mortgage interest rates drop. All forecasts still point to an increase in interest rates, about one point in the next year, but the increase has been temporarily stalled. Buyers can still take advantage of interest rates at historically low levels.

Source: Steven Thomas, President, Altera Real Estate