A Spooky Market

 The following piece was written by my associate, Steven Thomas.  He is the Quantitative Economics and Decision Sciences specialist who writes for the O.C. Register and consults to the Orange County Association of Realtors.  His words precisely reflect the dynamics I see day in and day out in this current market.

The market is recovering, but there are aspects of Orange County housing that are simply spooky.

Spooky CharacteristicsAs the kids scurry from house to house in anticipation of a Halloween treat, it is appropriate to take a look at the housing market from a different perspective, the things that are spooky about real estate.

My kids have been planning a neighborhood, second annual Spooktacular Haunted House, my house of course.  They put together a detailed map and determined all of the “perfect” spots to jump out and scare those that dare enter.  I remember being a kid and slowly making my way through an unfamiliar maze of scares within a home.  With timid steps, my heart pounding, and eyes closed, I cautiously approached a corner, not knowing what lurked there ready to pounce on my nervous anticipation.  In prior years during the downturn, that described the mood of the housing market to a tee.  Not this year.  With homes appreciating again, inventories much lower, and demand much higher, there is nothing to worry about, right?  Wrong.

 The number one spooky feature of today’s market is the absurdly low inventory.  Everybody has heard that inventories are low, but the depth of those lows is only understood by active buyers and sellers today.  There are only 4,043 homes on the market after shedding an additional 4% in the past two weeks.  The most recent prior record low inventory was established in March 2005, with 4,912 homes.  That is 21% more than today.  It reminds me of the kids combining all of their Halloween candy, and then flash forward a couple of weeks down the road as they scrape the bottom of the bowl.  The candy that remains is nobody’s favorites.  Similarly, most homes that remain on the active inventory and not pending after many weeks on the market are your overpriced “black licorice,” or have some other underlying reason for not selling.

The concern is that there will not be a lot of fresh inventory for the remainder of the year.  We are continuing to test new lows and buyers that remain in the hunt are going to get no relief from the holiday slowdown.  There just are too few homes on the market and buyers have come to the realization that it is finally time to buy.  So, many buyers are going to feel like they have the appropriate strategy of pouncing on a property during the holiday lull.  Given the number of buyers who have been unsuccessful after writing multiple offers, expect many of them to attempt the same strategy.  As a result, they will encounter continued competition to purchase.

Another “spooky” concern are the number of homeowners that are entering the housing market way too overconfident.  Not too long ago, buyers were in control of the market.  Flash forward to today, just a half of a year into a healing housing market, and sellers are getting ahead of themselves and offering ridiculous asking prices.  Given supply and demand, buyers are willing to pay a little bit more than the last closed sale within hot ranges and hot areas, but, if you are a seller, hold your horses.  For most homes, a few thousand dollars more than the last comparable sale is agreeable to buyers in the midst of a lot of competition, but they will walk away, or will ignore altogether, a home that is listed at 10% above the last comparable sale. 

The median sales price in Orange County was up nearly 6% in a year.  That means it took 365 days to go up 6%, not a couple of months.  The problem with some sellers is that they price their homes 6% or more than the home that just closed last week or last month.  Homes do not appreciate that much in such a short period of time.  It takes much longer than that. 

For those sellers willing to keep their home ready to show day in and day out for a year, the market just might appreciate to their overzealous price in time, a very, very long time.  With so few homes on the market, even overpriced homes will be shown a lot; they simply will not sell.  Instead, they will waste everybody’s time, including their own, as tons of willing and able buyers tour their home without writing an offer.  Any offers generated will be “lowball” in the minds of sellers, but in the minds of buyers, they are strategizing on ways to get the seller off of their high horse and back down to reality.

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