Buyers Have to Jump through Hoops to Obtain a Home in Orange County.


I saw a photo of a listing in Nashville where our daughter lives and had to laugh.  This really spells out where we were in February in Orange County.  I was busy warning my clients that they need to buy immediately or inventory would disappear and home prices would increase.  Nobody tells it better than Steven Thomas who I consider my partner in my business.  See what he is saying this week:

The Buyer PerspectiveIt is no longer a walk in the park for buyers.

Buyers quickly find out the hard way that all of this “hype” surrounding a market recovery is not hype; it is the stark reality in the real estate trenches.  It is tough to be a buyer.  REALTORS® have to sit down with buyers fresh to the market to explain the harsh contrast between their perception of the housing market and what they will actually experience.  There are many that have a hard time believing this new reality.  It is not that real estate professionals are standing on their soap boxes exclaiming that “NOW IS A GREAT TIME TO BUY!”  Instead, buyers have come to their own conclusions that it is smart to buy now.  The only trouble with that is scores of shrewd buyers have figured it out all at the same time.  Thus, there is tremendous competition.  Throw in the fact that there are 15% fewer homes listed this year so far compared to last year and you have what we see today, a hot real estate market.  Values have stopped dropping and are starting to creep up.  Interest rates are at the lows we most likely will never see again.  Combine lower prices with low interest rates and affordability is at levels not seen in well over a decade.  Based upon the median sales price and the average interest rate of the year, payments have not been this low since 1999.  That was the year that the Senate conducted the impeachment trial of President Bill Clinton and both The Matrix and The Sixth Sense were in theaters.  There is a palpable sense that we not only have reached bottom, but that we are starting to recover.  Many have been waiting for somebody to officially ring a bell and call a bottom to the real estate market, and that has sort of occurred.  When enough prognosticators and professionals proclaim a bottom, it ultimately becomes one.  And, consumer confidence is on the rise. 

In the coming months, real estate news is going to be about “surprise” appreciation.  But, it should not come as a surprise.  There are some communities, and especially condominium complexes, that have dropped too much.  They refer to that as “overshooting” where fair market value really should be.  We can all agree that the housing market was overpriced in the mid-2000’s, but a 50% drop in some communities is a bit absurd.  That is too much.  It happens when there are too many short sales and foreclosures competing with each other in close proximity for a small pool of buyers.  Ultimately, it becomes the property with the lowest price that achieves success.  It is no wonder that  I have already heard of pending sales, and even closed sales, that are well above recent comparable sales in those communities that “overshot” their needed correction.  They will experience larger jumps.  The rest of the market is experiencing appreciation at a much more sustainable, slower rate, climbing a few thousand dollars at a time above recent comparable sales.  Appreciation will be inevitable.

So, by year’s end, everybody will hear that real estate has reversed course and that their net worth is increasing.  In turn, consumer confidence will increase.  As more and more homes close, new homeowners are going to jump start the economy by replacing carpet, painting inside and out, changing the landscaping, installing built-ins, making their new home their “home.”  And, with new home sites being graded throughout the county, more jobs will be created.  Typically, housing is what jumpstarts the economic engine during a downturn and this downturn is no different.  As housing heals, so will the overall U.S. economy.  It starts in the trenches of housing.  In Orange County, buyers are experiencing tremendous competition.  They realize that a bottom that has already occurred and they want to take advantage of buying at the start of a recovery.

The Active Listing Inventory and Demand: The listing inventory continued to drop and shed another 2% in the past couple of weeks while demand remained the same.

The descent in the active listing inventory has slowed considerably, but it is still dropping.  The listing inventory shed 106 homes in two weeks and now totals 5,626.  These are lows that we have not seen since June of 2005.  Demand, the number of new pending sales over the past month, remained at a very strong level, 3,684 pendings, a drop of only 3 in the prior two weeks.  For perspective, we haven’t seen demand this high in June since 2005.  With a low, tight inventory and robust demand, the expected market time is at only 46 days.  Last year at this time with the inventory at 11,388, the highest point of the year, demand was at 3,060, and the expected market time was 112 days.  The spread between the active inventory and demand has narrowed considerably and has not been this close since 2005.  When the spread is close, it is a seller’s market.  In this case, with all of the distressed activity, appreciation will not be rampant and unsustainable like it was in the mid-2000’s.  But, it has the look and feel of a seller’s market with multiple, strong offers.  When the spread between demand and the listing inventory is farther apart, it is a buyer’s market.  Buyers have the luxury of taking their time and, often, do not need to compete in purchasing a home.  Offers to purchase ask for a bit more flexibility in price and terms.  As you can see in the chart below, the listing inventory and demand have moved extremely close together, a seller’s market.  It is important to note, that overzealous, unrealistic sellers should not participate in this market and overprice their homes.  They simply will not be successful and they will ultimately waste everybody’s time.  Similarly, unrealistic, overconfident buyers looking for the unbelievable, unavailable, “rock bottom deal” need not apply.  For the buyers and sellers that do their homework and carefully, methodically approach the market, they will find success.

The Distressed Market: The distressed inventory dropped another 6% in the past two weeks.
In Orange County, the active distressed inventory, both short sales and foreclosures combined, continued to drop, shedding an additional 58 homes, or 6%.  This segment of the housing market is by far the hottest, representing only 18% of the active inventory but 41% of all pending activity.  Thus far in 2012, the distressed inventory has shed 2,179 homes, and now sits below 1,000 for the first time since 2007, totaling 992 total foreclosures and short sales.  In the past two weeks, the foreclosure inventory increased by only 7 homes and has an expected market time of 19 days.  The short sale inventory decreased by 100 homes in the past two weeks and now totals 742.  The expected market time is 20 days.  Yes, short sales may take a very long time to put together with the coordination of the lender(s) approval, the removal of HOA and/or tax liens, and bringing property taxes current.  With so few homes on the market, short sales are being swept up almost as fast as the foreclosure market.

Steven Thomas
Quantitative Economics and Decision Sciences

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