Orange County Housing Report
August 5, 2010

The backlog of short sales that are pending is dizzying. The lenders are in control of the real estate market and they are taking their sweet ol' time. Short Sales: Short sales take forever to close IF they close at all. It is not a secret that many homeowners in Orange County and across the United States have stopped making their mortgage payments and have been sitting in limbo for a very long time. Homes in this situation have often been referred to as the "Shadow Inventory." Many are seeking loan modifications in hopes of lowering their monthly mortgage payments and, if they are lucky, reduce their loan balances. Others are attempting to sell their homes as a short sale, where their outstanding loan balance is more than their home is worth. The problem lies in the fact that, even though short sales have a buyer willing to buy and a seller willing to sell, they cannot close the pending sale until the lender, or often lenders, agree to accept less than a full payoff. On average, this process takes 4 - 6 months to complete. When there are multiple lenders, homeowner associations that have not been paid, unpaid property taxes, collection companies and attorneys involved, the process becomes even more complex. The length of time it takes to close increases with a more complicated short sale. But not all short sales are complicated, and no short sale, regardless of its complexity, should take six months or more to close. All of the big lenders have talked about improving their handling of short sales, but ask any real estate professional and they will tell you that nothing has changed. At the current short sale closure rate (an average of 600 per month), it will take six months to exhaust the total number of pending short sales. Let's not forget that there are still another 2,922 short sales on the active market and another 1,077 that are on "Hold Do Not Show" for whatever reason.

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Many short sales take so long that the buyers simply lose their patience and walk away. When this happens, the home is placed back on the market adding more time to the overall process. It is no wonder that many buyers and buyers' agents have shied away from short sales completely, preferring to work with equity sellers. Until the lenders come up with a better process, short sales will continue to slow the recovery of the Orange County housing market and markets across the United States.

The Orange County inventory increased by the smallest amount in the past three and a half months, adding an additional 179 homes in the past two weeks and now totals 11,414. During 2009, the inventory increased by 319 homes, to a height of 11,606 homes in March, followed by a steady decrease for the rest of the year. Contrast this to 2010 where the inventory has so far increased unabated, reaching a new height for the year at every reading. The good news is that it looks as if it may finally be reaching a peak. Typically at the end of summer fewer homeowners place their homes on the market. Also, as the media continues to report on the cooling of the housing market that has taken place since the end of the Federal Buyer Tax Credit in April, homeowners will once again face the reality that the challenges of the housing market are not behind us and will become more discretionary when deciding whether or not to sell. Hopefully this trend will result in fewer homeowners placing their homes on the market to "test the water." With all of the reports of incredible demand, multiple offers, homes selling at their list prices (or more), and increases in the median sales price, during the first six months, many homeowners who were duped into thinking that the housing market had recovered and that the time had come to cash in. Too many placed their homes on the market at unrealistic prices. Despite a solid demand, this phenomenon helped the inventory to increase from 7,293 homes to 11,414 today, a 4,121 home increase.

It is official: Orange County housing demand is now following a normal cyclical pattern. Demand, the number of new pending sales over the past month, increased by 102 in the past two weeks and now totals 2,972, a 4% increase. This is still 25% off of the end of the April peak of 3,979. Last year at this time demand was at 3,471 pending sales, 499 more than today. From here, we can expect demand to peak for the year at the end of this month before slowly slowing declining as we begin the autumn market.

After peaking two weeks ago at 3.91 months, the expected market time dropped slightly to 3.84 months. The overall market is a "seller's market," but it is important to remember that today's "spreadsheet" buyers are unwilling to pay much of a premium over the last comparable sale. There is still a major difference in the market time for the lower price ranges versus the upper price ranges. For homes priced above $1 million, the expected market time is 9.64 months. Contrast that with homes priced below $1 million where the expected market time is 3.35 months. Last year at this time the expected market time was at 2.50 months.

The active distressed inventory grew by another 118 homes over the past two weeks and now totals 3,575 total foreclosures and short sales, levels not seen since April of 2009. The active distressed inventory started the year with 2,555 homes and has since grown by 40%. The distressed inventory now represents 31.3% of the current active inventory. Last year at this time, there were 2,559 distressed homes on the market, 1,016 fewer than today.

The number of foreclosed properties within the active listing inventory has increased by 40 homes in the past two weeks from 613 to 653. The expected market time for foreclosed properties is 1.88 months, still a HOT seller's market, but, of course, the seller is the bank. Short sales, where a homeowner attempts to sell a home for less than the total outstanding loan balance against the home, requiring lender approval, increased by 78 homes over the past two weeks and now total 2,922. The expected market time for short sales is 2.86 months, also a HOT seller's market, but slower than the 1.53 month market back in April. There is no lack of buyers for short sales, only a lack of approvals and funding by the lenders.

Source: Steven Thomas, President, Altera Real Estate