So, without a proper base to
stabilize our crystal ball, let’s see what 2012 glimpses we can garner as the
ball rolls by.
Demand: A return to a normal housing cycle.
In 2011, demand followed a normal housing pattern. The Spring
Market experienced the most demand, followed by a slightly slower Summer Market,
then a slower still Autumn Market, and finally a much slower Holiday Market.
There wasn’t the influence of a first time home buyer tax credit or the sudden
tightening of credit to affect demand like there had been in the prior three
years. In 2012, demand will closely follow the same pattern as in 2011, but at a
just slightly higher (3% - 5%) level. Currently, the housing market is shaking
off the effects of the holiday. For the lower price ranges, below $750,000,
which accounts for 76% of the listing inventory, the market will heat up quickly
as we roll into the spring. We are starting this year with 19% fewer homes for
sale when compared to a year ago. With fewer homes on the market and similar
demand, it is going to feel more like a seller’s market, complete with multiple
offers and sales prices close to their asking prices for homes priced below
$500,000, assuming, of course that that the sellers price their homes
accurately. Even so, sellers can expect that buyers will be unwilling to pay
extra for a home, regardless of the number of offers on the table.
Today “spreadsheet” buyers carefully study recent sales, pending sales, and
local market trends to arrive at an offer price. In the lower price ranges,
competition will remain strong until the market begins to decelerate in the
fall. For homes priced between $750,000 and $1.5 million, which represents 14%
of the active inventory, the market will heat up during the spring, just not as
much as the lower ranges. For homes priced above $1.5 million, representing 11%
of the active inventory, the market is and will be the antithesis of the lower
ranges, a deep buyers market that will require accurate pricing, time and
patience to achieve a sale. There are just too many sellers vying for a much
smaller pool of potential buyers.
Pricing: Pressures on price depend
upon the price range.
In the lower price ranges, we can expect very little change in pricing. 76%
of the market is priced below $750,000 and 56% are priced below $500,000. I
believe that in some unique areas and neighborhoods, the market could even
appreciate slightly. However, the distressed properties, which represent 47% of
the active inventory in the lower ranges, will keep a lid on any real
appreciation.
For the middle price ranges, we can expect slight depreciation in prices
because of lower demand, probably less than 5%. Since only 15% of the inventory
in these price ranges is distressed, the pressure on pricing is not as great,
otherwise the rate of depreciation would be higher.
In the upper price ranges, above $1.5 million, 5% of the inventory is
distressed properties. In these price ranges the distressed inventory does not
have as much of an impact on prices. Instead, there are just far too many
sellers and not enough buyers. Values in the lower price ranges dropped
seemingly overnight in a flood of distressed homes, and have subsequently
stabilized. The upper price ranges have not been inundated with distressed
properties; thus, the downward movement in values has been a much slower
process. In essence, they are arriving late to the party. In 2012, prices will
be most volatile in the upper price ranges just as they were in 2011.
The Active Listing Inventory: Which
will prevail, prudence or imprudence?
There are 19% less homes for sale in the active listing inventory this year
when compared to last year at this time. This will help spur immediate demand
early on in 2012 which will attract multiple, strong offers. This scenario also
occurred in 2010 when there was an additional 10% fewer homes available for sale
at the beginning of the year when compared to today. Then, many people
misinterpreted all of the activity to mean that the housing market had
recovered. So, way too many homeowners decided to “test the water” and listed
overpriced homes. The active listing inventory grew by 40% that year. In a
downturn, overpriced homes do not sell; they stay on the market until the
price is reduced or they are pulled off the market. Homeowners paid attention to
these phenomena and in 2011 the inventory increased by only 14% during the first
half of the year, and decreased 26% during the second half. I am concerned about
our selective memory. In 2012, prudent sellers will continue to price their home
in line with the most recent sales in the area and the most current pending
sales, taking into consideration the recent local market trends. Imprudent
sellers will, based on the “market frenzy hype”, price their homes above what
the statistics support. I expect some imprudence again this year. The active
listing inventory will likely grow through the first three quarters.
The Distressed Market: Distressed
properties will continue to play a major role in the market.
The banks have developed their strategy for dealing with distressed homes and
they are not about to make any major changes. Many people have stated that it
would be best to let the market work through the distressed inventory on its own
and banks should just open the flood gates. This is not going to happen.
Foreclosed properties are a hot commodity in the OC. Currently; there are only
620 foreclosed properties on the market in the entire county with an expected
market time of 1.76 months during the slowest time of the year. Ask any buyer
who has attempted to purchase a foreclosed property and you will find that it
extremely difficult to do.
There are plenty of homeowners who have defaulted and the banks have been
slow to foreclose. In Orange County, most non-redeemed defaults become short
sales. Currently, there are 2,517 short sales on the market and 5,144 more that
are pending. However, only about 500 short sales close per month. Short sales,
which require lender, or often lenders approval to take less than the loan
amount, are complicated and take a very long time to put together. This too, is
not going to change anytime soon. It is important to highlight the fact that
short sales have an expected market time of 2.5 months, pretty hot when compared
to the rest of Orange County housing market, largely because they are priced at
market value, often less the cost of deferred maintenance, and are in better
shape than foreclosed properties. So, lenders are not going to change course at
this point and adopt a different strategy. They aren’t going to quickly
foreclose on everybody and let the market work it’s self out. You don’t have to
be an economist or expert to understand that if you suddenly flood the market
with foreclosures, prices will free fall again. If prices dropped significantly
again, more homeowners will be under water, confidence will drop, unemployment
will increase and the economy will fall into a deep abyss. Sure, lenders do not
intend to allow homeowners in default to remain so indefinitely. They will
rattle the foreclosure saber to push these homeowners toward a short sale, which
is the best solution for everyone involved in a non-redeemable default
situation. For the year, there will be a slight increase in the number of
foreclosures and short sales, about 5%, but don’t expect any significant
changes.
Interest Rates: Record low interest
rates will NOT last forever.
Interest rates are probably the single most unpredictable feature of the
housing market. Nobody has predicted correctly thus far and current forecasts
are all over the board. Prognosticating the future of interest rates is like
throwing darts at a dart board from a thousand feet away. I will go out on a
limb and predict interest rates will increase to 4.5%. I just don’t see the
international money flight to the safety of US bonds changing anytime soon.
(Mortgage rates are primarily affected by treasury yields, rather than the prime
interest rate.) But, we need to understand that it is not a matter of if
interest rates will rise, it is a matter of when. The Federal government has
dumped trillions of dollars into the system. When this happens, the threat of
inflation increases, a threat that someday becomes a reality. To fight against
inflation, interest rates will have rise. Unfortunately, everybody is so used to
these historically low interest rates that they are taking them for granted. The
current interest rates coupled with lower prices makes owning a home much more
affordable than in recent years. We have to go all the way back to the year 2000
to find circumstances that allowed for similar payments levels. In 2000,
interest rates were at 8%. In 1990, interest rates were at 10%. In 1980,
interest rates were at 16%. It’s funny what we get used to. 4% interest rates
are very rare phenomena. Taking advantage of them will produce a payoff every
single month for 30 years.
Closed Sales: The number of closed
sales has not changed much over the past several years.
The number of sales is below the long term average; BUT, there are still
about 27,000 residential existing home sales taking place each year in Orange
County. 2007 and 2008 were record slow years. 2009 through 2011 were much
better. In 2012, we can expect to be very close to the same number of sales
again with an increase of 5% or less, and they will follow a normal cycle, just
like demand.
