Someone needs to draw me a picture, because I don’t get it. It feels like every day someone smart, someone I know and respect, leans in to whisper conspiratorially that they hear “… there’s another real estate market correction coming soon”. I’m getting barraged with a virtual plethora of Chicken Littles. It’s bizarre. And I’m just not seeing it here in Orange County. At least not yet.
I do see that that ridiculously low interest rates and erratic stock market conditions are making it harder and harder for buyers to save money for a down payment. I do see that employers who were “incentivized” to hire more people mostly did’t. But I also see that these same low interest rates are fueling a steady stream of buyers who are getting obscenely low rates on home loans, and who will most certainly be shocked when mortgage rates inevitably rise in the coming year. That is when we may see the start of some significant changes.
According to to Federal Reserve, we are seeing price stability for two reasons. “The lingering price illusions left by the speculator frenzy of 2013-2014; and the recent drop in mortgage rates which has increased buyer purchasing power.” They went on to say, “Once mortgage rates rise consistently, buyer purchasing power will decrease and prices will suffer.” With this, I agree. Just not with a looming real estate apocalypse.
Back to the here and now. Sales volume in all price ranges traditionally starts falling in August as families send kids back to school and their collective focus is elsewhere. Between mid summer, when we see the highest annual level of listing volume, until the end of the year, when the fewest homes sell, there is usually a steady reduction in both home supply and buyer demand month over month.
We got to the tipping point later than usual this year, because it was less of a point and more of an extended peak plateau. This may very well have been caused by the slight dip in mortgage rates, instead of the fearfully anticipated rate increase. Whatever the cause, inventory peaked a tad early this year, reaching 10,1621 homes2 for sale in June, with 3,117 sales closing that month. What was not so typical was inventory decreasing to 9,201 homes in August, yet with a hearty 3,052 sales closing. While closed sales are a lagging indicator, since it takes an average of 40 days to close an escrow, this summer with its robust and longer than usual duration of peak sales volume presented a nice little bonus for both buyers and sellers.
These same Chicken Littles seem to enjoy opining that inventory levels are artificially bloated. As a reference point, 10,352 was the peak in July 2015, 11,217 in July 2014, 9,306 in August 2013 and 12,099 in May 2012. Doesn’t make 10,162 homes look very bloated now, does it?
At the current rate of sales absorption (AKA “Market Time”), it would only take 3 months to “sell out” of all listed homes. Of course, demand will now start to wane. But so too will supply. Sellers get just as distracted by life events, and fewer and fewer homes enter the market each month as the year draws to a close. I would brace for a rapid start to the decline in both inventory and sales to offset this long summer sales fervor.
What is different and most noteworthy is that we are seeing the same bifurcation of our real estate market as is being witnessed in different regions across the country, with an ever widening gap between the “haves” and the “have nots”. We have dwindling supply of the lowest priced homes and both slightly increased supply AND demand for homes priced above $1 million. The “middle” is at risk of slowly eroding away.
To really blow your mind, check out the illustrations below. The first chart depicts OC inventory (green) and sales volume (blue) across all price ranges for the prior 4 years. Looks pretty, well …um, stable. Right?
Based on what I am seeing from the front lines, buyers are buying when they see value. And sellers are selling when they are reasonable. Yes the average sales price in Orange County is going up. But not necessarily because of appreciating prices, which are mild in most areas, moreover it’s because there are slightly fewer lower priced homes sold and slightly more luxury homes sold. An uptick of just 5-10 luxury homes sold skews the sold price average more than you might think.
Despite all the whispers of radical and impending market decline, I see evidence of market stability for the rest of this year. Presidential election years are always question marks. And interest rates are going to start rising in the coming months as well. Both of these will certainly have a cooling effect at the beginning of 2017. But cooling is not the same as reversal. And before long the freeze will thaw and Spring sales will again precipitate the steady upward momentum of home sales as we advance into summer 2017.
Based on current inventory levels, if you’re looking for the best place to buy a home right now, I’d suggest Dove Canyon, Laguna Beach, Newport Coast, Talega or Yorba Linda where there is currently far more supply than demand.
And if you’re considering selling and you own property in Foothill Ranch, Fountain Valley, Los Alamitos, or Portola Hills, you should list it TODAY. There is virtually no competition. You’ll find a buyer by being the only show in town.
That’s all for now. Stay tuned for September’s report. Maybe the sky will fall then.
1 All data is derived from MLS records, which are deemed reliable.
2 “homes” is defined as single family homes, condos, coops, and residential/commercial mixed use property.