Orange County Housing Report
September 16, 2010

Interest Rates: Interest rates are at historically low levels and seem to be taken for granted. I have always found it fascinating that so little attention is paid to how much interest rates can affect purchasing power. The current low rates actually pencil out to be so much more beneficial to a buyer than the $8,000 First Time Home Buyer Tax Credit; yet, the lower rates seem to generate much less demand than the tax credit did. Consider a $500,000, 30 year, fixed rate mortgage (current purchase power) at 4.375%. The monthly payment is $2,496 per month. The same monthly payment at 5.375%, which is where rates were just one year ago, would reduce a buyer's purchase power to a mortgage of $446,000, a $54,000 difference. This difference is almost seven times the amount of the tax credit. Another way to look at purchasing power is by considering the payment. The payment on a $500,000, 30 year, fixed rate mortgage at 5.375% is $2,800 per month or $304 per month more than it would be at today's rate of 4.375%. In just five years, the savings would be a very impressive $18,240. Over the life of the loan, 30 years, the savings would be $109,440. The apparent lack of focus on these numbers resulted in first time home buyers tripping over each other to purchase a home prior to the end of the tax credit on April 30th, and a lackluster interest in purchasing ever since. As soon as the economy starts to improve, interest rates will increase by at least one percent.

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To a buyer, today's rates should be very motivating. The best time to purchase is during the off selling season, in a buyer's market with rock bottom rates. Unfortunately, low rates don't seem to capture headlines like an $8,000 credit. For further perspective, buyers should consider that interest rates were at 8% at the beginning of 2000. For a $500,000 mortgage, the monthly payment would be $3,669, an additional $1,173 per month over the same mortgage amount at today's rates. In 1990, rates were at 10%, which would be $4,388, an additional $1,892 per month. Buyers cannot afford to ignore today's rates. They should not be taken for granted. As soon as the economy improves, rates will increase and buyer's purchasing power will begin to erode.

Since reaching its 2009 height at the end of April, demand has dropped 32%. Demand, the number of new pending sales over the prior month, dropped by an additional 203 pending sales over the past two weeks and now totals 2,690. The incredibly low interest rates should spur demand. With the tax credit anomalies behind us, and the kids settled into the new school year, it will be interesting to see if demand experiences an increase.

The active listing inventory grew by 175 homes in the past two weeks and now totals 11,892. We started the year at 7,165 homes and have increased since by 4,727, a 66% increase. With demand artificially stimulated atthe beginning of the year by the tax credit, many sellers were fooled into thinking that the market had indeed turned around. They took reports of year over year increases in the median sales prices and stories of heated demand and multiple offers as the perfect time to dive into the market. Unfortunately, many of these sellers priced their homes at unrealistic levels, thousands of dollars above the last comparable or pending sale, as was normal in years past. The end result: we have a bloated inventory and a lot of over priced homes.

For homes priced below $1 million, the expected market time is 3.87 months. This range represents 82% of the active inventory and 93% of demand. For homes priced above $1 million, the expected market time is 12.02 months, the higher the range, the slower the expected market time.

This range represents 18% of the active inventory, but only 7% of demand. The slowest range, homes priced above $4 million, has an expected market time of 70 months. The hottest market in Orange County is Foothill Ranch with an expected market time of only 2.38 months and an average list price of $467,000. The slowest market in Orange County is Newport Coast with an expected market time of 12.08 months and an average list price of $4.4 million. The expected market time for all of Orange County is 4.42 months. Last year at this time the expected market time was 2.33 months.

The active distressed inventory grew by 110 homes over the past two weeks and now totals 4,026 total foreclosed properties 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 58%. The distressed inventory now represents 34% of the current active inventory. Last year at this time, there were 2,384 distressed homes on the market, 1,642 fewer than today. The number of foreclosed properties within the active listing inventory increased has by 24 homes in the past two weeks from 684 to 708. The expected market time for foreclosures is 1.84 months, still an exceptionally HOT seller's market. Short sales, which occur when a homeowner attempts to sell a home for less than the total outstanding loans against a home, increased by 86 homes over the past two weeks and now total 3,318. The expected market time for short sales is 3.61 months, much slower than 1.53 months posted last April.

Source: Steven Thomas, President, Altera Real Estate