Everyone wants to know what’s around the next corner for Orange County real estate. Deciding whether it’s a good time for you to buy or sell isn’t easy in this quirky market, unlike back in 2008-2009 when it was pretty clearly time to pick up a bargain. Knowing when to catch the falling knife requires more sophisticated interpretation of sales data, a clear understanding of what your needs are, and most importantly, an honest assessment of your personal pain threshold. You may need to commit to buying and holding for a while.
This is not the time for the faint of heart to play the real estate game.
Per Steven Thomas, local quantitative economist, since January 1st the active inventory has only grown by 500 homes. In the past couple of weeks, it grew by an additional 111 homes, or 2%. The inventory is not climbing as fast as prior years, he states, because current demand is extremely hot. Additionally, so far in 2017, 11% fewer homes have come on the market compared to last year at this time. Within the last month, the trend deepened with 15% fewer homes coming on the market compared to last year. Why weren’t homeowners placing their homes on the market like before? Could it be all of the recent rain?
More and more homeowners will start coming on the market as Orange County transitions into spring with longer, sunny days. Last year at this time, there were 5,444 homes on the market, 19% more. Two years ago, there were 5,560 homes on the market, or 22% more.
The disparity of inventory available in different price ranges continues to skew the Orange County average home price, which crept up to $1.7 million in February, up from $1.6 million at the end of January. However, because there are 50% fewer homes available at or below $500,000, this “average” price is deceptive and does not demonstrate appreciation across the board.
Buyer Demand Remains Strong
Buyer demand continues relatively unabated. The number of homes placed into escrow within the prior month, decreased by 75 pending sales in the past couple of weeks, or 3%, and now totals 2,575. The drop is attributed to the short month of February versus Leap Year last February. Also, demand would be even stronger if more homes were added to the active inventory. There just are not enough choices to satiate today’s scorching hot demand.
Understand the Data
With a slight drop in demand and an inventory that grew a bit, the average expected market time increased from 50 to 53 days, continuing a rock solid seller’s market. This is a classic example of where data can be misleading. One could interpret that a longer average market time indicates cooling buyer demand when, in this case, it likely only means buyers can’t find anything they want to buy.
Real estate market statistics can be interpreted a variety of different ways, which is why we need seasoned market analysts to help peal back the onion. Steven Thomas, makes the argument that scanty inventory and rising lending rates should create immediate buyer urgency. And he’s right – mostly. However, our healthier economic climate has also brought a new wave of cash buyers, who are out there in force. And as is typical for cash buyers, they are not willing to pay a penny over fair market value. This enhanced buyer competition may send buyers needing financing back into the rental market.
Record Fast Market Time Continues
The average Market Time for Orange County overall was 53 days at the end of February – a deep Seller’s market. With homes priced at or below $750,000 selling within 31 days – hotter still. The average time on market for homes priced $750,000 to $1 million is only 55 days – also absolutely a Seller’s market. Remember that historic average market time for homes priced below $1 million has been 90-180 days depending on the season. Homes are selling at twice this average speed.
For luxury homes priced between $1 million to $1.5 million, the expected market time is at 87 days, increasing by 13 in the past couple of weeks – still hot. For homes priced between $1.5 million to $2 million, the expected market time increased from 129 to 133 days. For luxury homes priced above $2 million, the expected market time increased from 227 to 252 days. This is still 11.6% faster than last year at this time.
Rental Rates Remain Strong
Other experts are closely watching the increase in rental rates relative to rising home prices. I personally suspect this represents the most critical tipping point. When it effectively costs as much to rent as it does to buy, home sales should surge. Additionally when a mid market buyer ($750,000 – $1 million) can’t find a home they can afford and they LIKE, we’re already seeing them return to renting.
According to OC Register, house rents averaged $3,114 a month in Orange County during the fourth quarter of 2016, according to Irvine-based HomeUnion. After tax benefits, this roughly equates to an $875,000 purchase price with a 20% down payment.
That’s up 22 percent, or $561 a month, over the past four years, vs. a 13 percent increase for apartment rents during the same period, figures from Reis Inc. show. Interestingly this represents a surge in demand for single family homes to rent, versus condos. Yet most new home builders are building condos and apartments. That’s where you come in.
Buyers Best Bets
The traditional 5-6% vacancy rate for houses has decreased to 3% in Orange County. The safest bet for 2017 seems to be buying the nicest detached home you can comfortably afford, ideally below $900,000. When home buyers taper off, frustrated by the limited availability of housing, they will rent instead. Conversely when rents finally rise too high, they will look toward buying a home again. You can plan to rent it now and then sell it later – both are winning recipes.
What does this mean to you? If you own real estate worth $750,000 or less, you might want to sell it now, while your target pool of buyers can still get the best loan terms and rentals are still a less attractive alternative. If you own property worth more, I’d still get it on the market with the most comprehensive international marketing strategy, aimed at getting foreign buyers who are interested in a stable US investment. Cast a wide net.
If you want to convert your real estate into rentals, a few savvy updates will make it most appealing to today’s picky renters.
Call me if you’d like to learn more about what buyers and tenants are demanding, or to evaluate your local market. Together we’ll create a strategy specific to your financial goals.