Orange County Housing Report
January 21, 2010

Orange County Real Estate | Download a Printable PDF

Contrary to the norm, the recent rains have not dampened the Orange County housing Market.

This year's early growth in inventory and demand is not just an Orange County phenomenon, but rather Southern California phenomena. There are many skeptics and naysayers who believe that the hot market is temporary and totally propped up by the government. Many point to the tax credit, or the low interest rates to explain the current hot demand. Others point to the "shadow inventory" of foreclosed properties that lurks around the corner to destroy demand. (I addressed the shadow inventory in my January 7 issue of the Orange County Housing Report.) Still others believe that with the Federal Reserve Board discontinuing their purchases of mortgage backed bonds at the end of April, demand will wane. The skeptics talk about a double dip recession or that the real estate market is starting to inflate into a new bubble. Bearish blogs and emails with web links to pessimistic articles abound.

But, what the current naysayers and skeptics are missing is that values have dropped to levels that have improved affordability substantially.

First time home buyers now represent a major segment of demand. Interest rates remain at historically low levels. Investors have reemerged. Interest rates will increase this year, helping to curtail overzealous demand. Even though the government is stating that the end of their mortgage backed bond purchases is coming, they will not let rates increase much past 6%, and will they will continue to purchase these bonds if they need to. The curtailing of these bond purchases by the government has another positive effect, the less the government purchases of these bonds, the higher the interest yield of the bonds, because with less demand, the bonds must pay more interest to be attractive to investors. As the interest rate of these bonds increase, they become more desirable to the private investment community. A solid foundation to our mortgage market depends on a stable mix of government and private investor purchase of these bonds.

Also, we should keep the current interest rates in perspective. They were at 17% in 1980, 10% in 1990, and 8% in 2000. 5% rates have helped resurrect the market, but they can float up and we will still have demand.

It's the incredible drop in prices that has fueled demand.

If one takes historical data into consideration, values have dropped too much. They were way too high back in 2005, but they are too low in 2010. Does that mean that Orange County real estate is going to appreciate this year? Not with so many distressed properties on the market. Distressed properties are keeping a lid on appreciation for now. Don't get me wrong; the tax credit has helped fuel demand. So have lower interest rates and government programs. But, basic economics always prevail. As prices fall, demand increases. They eventually fall to a point where demand begins to surge. This surge places a bottom on the drop in values. The lower price ranges have bottomed (and in some really hot areas are actually increasing). Currently, there is almost too much demand. Showing a buyer a home in the lower ranges today is just like the heydays of 2004 and 2005. The problem is that there just are not enough inventories to meet demand.

The active inventory increased over the past two weeks by 387 homes, or 5%, to 7,680. The active inventory last year was at 11,560, 3,880 additional homes compared to today. Two years ago it was at 15,245, 7,565 additional homes. The current increase is typical for this time of year. We are at the beginning of the spring market.

During the past two weeks demand, which is defined as the number of new pending sales over the prior month, increased 11% to 2,547 pending sales. The Orange County housing market has not produced demand this strong at this time of year since 2004. Last year's demand was at 2,146 - 401 fewer pending sales than today. Two years ago it was at 1,219 - 1,328 fewer than today. The expected market time is currently at 3.02 months, a slight change from the 3.22 month mark posted two weeks ago.

• MARKET 1: the below $1 million market. The vast majority of the market is below $1 million. This market represents 77% of the active listing inventory and 93% of current demand. The expected market time for homes priced below $1 million is 2.5 months, a seller's market with multiple offers that fetch sales above their asking prices. This is especially true below $750,000. This market is sizzling.
• MARKET 2: between $1 million and $1.5 million. This market represents 8% of the current active inventory and 4% of current demand. The expected market time is 5.73 months, which is just about at equilibrium. This market is all about price. Sellers that overprice their homes will likely not sell them. Buyers can afford to be more patient, however, distressed properties that are priced well are snapped up quickly. This market is tepid.
• MARKET 3: homes priced above $1.5 million. This market represents 15% of the current active inventory, yet only 3% of demand. The expected market time is 18 months. Anything above 10 months is virtually at a standstill, a deep buyer's market. This market is frozen.

Over the past two weeks the distressed inventory increased by 118 homes to 2,673, levels last seen in July of last year. The number of foreclosed properties for sale actually dropped from 375 to 355.

The expected market time for foreclosed properties is an unbelievable 0.94 months, a deep seller's market. If you are a buyer interested in a foreclosed property, you must be prepared to submit a clean offer for 3% to 4% above the asking price. The number of short sales on the active inventory increased by 138 and now totals 2,318. The expected market time for short sales is 2.17 months, also a seller's market. These too require buyers to make their first offer their highest and best offer. 34.8% of the active inventory is distressed. Last year at this time 44.2% of the inventory was distressed. Distressed properties are fueling demand as well.

Source: Steven Thomas, President, Altera Real Estate