I nearly spit out my coffee at a breakfast presentation when Dr. Mira Farka, Professor of Economics at Cal State Fullerton, opened her 2017 Economic Forecast by saying that our economy is “Twerking toward a lesser abnormal.”
I love it.
Our residential real estate market has been slowly returning to something less bizarre, albeit not quite normal either — she couldn’t be more right.
We had subtle increases in home sales and appreciation in 2011-2012, then a spike in sales in 2013 when prices also shot up. Then we had sluggishness again throughout 2014. Another uptick came in spring and early summer of 2015, only to dramatically taper off into fall, with a brief end of year “hurrah” as sales exceeded expectations.
Overall prices remained unspectacular. During this correction, home sales would surge, wobble, retreat, flatten, surge, flatten… You get the idea. Twerking.
2016 was even less remarkable and thus a little less abnormal. The year began with modest sales, as expected, yet summer sales never quite reached the peak volumes of either 2013 or 2015. Instead, we got a tepid 2014 all over again. The expected slowdown in December and January didn’t materialize, which instead resulted in a remarkably steady rate of sales. It was delightfully average, making up for the lackluster summer. The net net of the year was that we had average sales and modest appreciation. It just didn’t come when expected.
2017 has started with fewer listings and sales than in December, yet more than at the beginning of the prior two years. Also interesting is what is selling: 20% more homes priced $1 – 1.5 million are selling in Q1 so far this year than in the prior two years at this time. Inventory is keeping pace with buyer demand in most OC areas in which homes are priced at or below $1.5 million.
Those sub-$1.5 million homes currently represent 74% of the inventory, but 93% of the demand, whereas those above $1.5 million are 26% of the available inventory, yet only 7% of the demand. This mismatched inventory is what is skewing Orange County’s average home price, which is now $1.6 million, compared to $1.4 million in 2016 and $1.3 million in 2015. It is not because we had double digit appreciation, it’s because we have fewer low-priced homes to sell. The “distressed” inventory has all but vanished.
Dr. Farka made another sage point about how changing demographics will impact the Orange County housing market, along with the overall economy, in 2017. Millennials*, who are now coming of age and entering the housing market, have eclipsed the massive Boomer population.
This savvy generation stayed home with Mom and Dad longer than previous generations, pursued advanced degrees to get higher paying jobs and stashed some cash in the process. Millennials are already hitting the market armed with digitally driven market data, along with great credit and cash for down payments.
Pay attention sellers: this is your new Buyer profile. And there will be 6.3 million of them in Southern California.
Dr. Farka reported that overall Orange County and Southern California are faring well. The average salary in Orange County is now $70,000, our prime-aged workers are faring better than the national average, and Southern California is now third in US exports (behind Houston and New York). She attributes the relative stability of our economy to our high level of industry diversification.
Even more encouraging was her report that 64% of Orange County’s residents are again homeowners, which gets us back to our historical average. At the same time, Southern California has regained $6.7 trillion of the $7.8 trillion in home values that homeowners lost during the recession. In a few months, she predicts we’ll have “clawed back to the peak” and regained all losses. By year end she predicts we’ll see 4-5% annual appreciation in values.
Her presentation ended with a few more hopeful predictions:
- Mortgage interest rates will have 2 or 3 more slight increases, but won’t impede home sales.
- Trump will reduce government “over-regulation” increasing corporate productivity, including rescinding or rewriting much of the Dodd-Frank & Volker rules that have slowed real estate growth.
- Caps on capital gains will also fuel the local economy, fueling home purchases.
Being the data geek that I am, I found all of this information fascinating. But its true importance is in helping you make better, more profitable real estate sales decisions in 2017. Here’s what I expect will happen:
- Buyers will spend even more time online researching homes for sale, and will also revisit homes they’ve targeted more times before they pull the trigger and write offers.
- Buyers agents will need to spend more time on detailed market and individual property analysis, providing real, verifiable data. More buyers will want a real estate “consultant.”
- Sellers will need to view their homes with fresh eyes, taking into account current buyers’ tastes and expectations.
- We’ll continue to see 10-20% failure rate in escrows, making Backup Offers highly desirable.
- More homeowners will continue to stay put longer, increasing the average time before a home resale from 6-7 years to 10 years and making this reduced inventory of resale homes a “new normal.”
- An increasing majority of homes will be both bought and sold by younger people as the aging population remains in their homes longer.
My best tips for sellers is to objectively and comprehensively evaluate your home’s attributes. The exterior style should match the interior. Thread color themes throughout the home for consistency. Clean, bright white walls are safest, while gray and grayish taupes remain popular. According to surveys, 63% of all home buyers say they now prefer white cabinetry. Don’t be afraid to refinish and paint cabinets as a quick update. Discard anything fussy, including draperies, valances, shower curtains, table cloths, etc.
If you want to sell your home in Aliso Viejo, Foothill Ranch, Los Alamitos or Rancho Santa Margarita, you’re in the driver’s seat. You should clean up your home and get it on the market NOW. Your odds of multiple offers is high.
If you’re a buyer and looking in the Dana Point, Laguna Beach or Newport Coast areas, you’re in luck. There is far more inventory than buyers. This advantage doesn’t mean you can offer absurdly less than the sellers are asking, but it may mean that you can negotiate for longer escrows, a little seller credit to help with closing costs or potentially even a thrown in patio BBQ or furniture.
As always, call me with any questions. I love them, so keep them coming!