If I had a dollar for every time someone told me we’re in another bubble, I’d be sitting on a beach somewhere and not writing this report. “Yep, the crash is coming, just wait!” They love to gloat. And when I disagree, they nod and smile knowingly, saying something like, “Of course you do – you’re a REALTOR!”
So, is this a bubble? Is a crash inevitable? Even if all evidence points in another direction, which it does, won’t buyer sentiment influence the reality of today’s market? If enough people believe something to be true, it will ultimately manifest, right?
Well Realtor or not, I am neurotically obsessed with data – I know, heaven forbid we look at facts. I check listing and sales volume constantly. The numbers continue to show us that there is high demand and limited buying opportunities. And while consumer confidence clearly has an impact on sales, I’m seeing this manifested on an individual property basis, rather than globally.
For example, if a perfectly average home is listed for sale at market value. But for some reason, like the sellers had trouble allowing showings so they accumulated a lot of days on market, buyers would start to ask themselves, “What’s wrong with that house, that it’s just sitting on the market?” And they become so obsessed with this festering story that they decline to go see the home at all. So it eventually sells for 95% of the asking price. This is versus an identical home that is vacant, easy to show, and sells for 101% of the asking price. It’s illogical. But that’s buyers for you. Their suspicious nature can affect the outcome.
Yet overall, the actual market data is telling the same story we’ve seen all year. There is still too little inventory to keep pace with demand. Yes, Orange County has 18% fewer sales than last year. We also have 20% fewer homes for sale. It’s looking like listing inventory is going to peak at 80-85% of the peak volume of the last two years – and even less than the year before that.
Buyers are cautious, yes. But they’re out there. And they’re serious about buying. The average home price has remained $1.6 million all year, with the exception of the pre-spring bump when the average price was $1.7 million for March closings.
This will come as a shock to most readers – in Spring 29% of all homes listed in the MLS sold above asking price. This doesn’t mean that agents are deliberately low balling the market. Instead it is a direct reflection of buyers’ willingness to compete for the best looking homes in the nicest areas. Competing buyers are often waiving their appraisal contingency, agreeing to pay any difference between the contract price and the appraised value.
On May 2nd I priced one of my own listings at $479,000. Which I felt was the best possible price for the immediate area given that the highest price paid in the complex was $470,00. Within 7 days we had multiple offers, ultimately selling for $490,00. Yes the buyer did waive the appraisal. But the appraised value came in anyway. And we set a new record high price.
It’s “dog eat dog” in the lower price ranges; and the experts all know it.
So when will we “crash”? According to the latest poll by Arch MI (as reported by Jonathan Lanner in the OC Register) OC is ranked as the 4th riskiest real estate market in the US. Okay, that’s scary. But as they also report, in context, this still only means that there is an 8% chance of OC home prices declining in the next two years. And there’s only a 3% chance of this happening statewide.
“It’s an extremely low risk,” Arch chief economist Ralph DeFranco says. “The fundamentals are strong.” Arch did go on to say that OC’s median home buyers are committing 55% of their income toward housing, versus a national average of 36%. This premium, or “Sun Tax” if you will, has always been the case here.
DeFranco among others, myself included, worry that interest rake hikes in 2018 will hit housing hard. Even so, the likely outcome for OC overall is sluggish sales and zero price gains. There is still the 8% chance of decline. Even so, any depreciation is not likely to be significant. And it is not at all likely at all in the lowest price ranges (anything below $750,000) where 63% of all current buyers are fighting over 39% of the actual inventory. Here is what this looks like, from a four year perspective. Buyer appetite is consistent, while inventory is vanishing.
So what does this mean for home buyers and sellers? If you want to buy, especially below the $750,000 mark, start now. There will be a fair amount of competition over the best homes. You may have to write a few offers before you win a deal. And mortgage rates are still attractively poised in the 4% range. And you must be prepared at all times to strike. This means having an updated loan approval and sufficient cash on hand to close an escrow.
If you are a seller, it’s a good idea to get your home on the market now as well, but only after you have made any minor repairs, deep cleaned, touched up paint and can ensure showings can easily be arranged. Otherwise, you’re wasting your time. The best looking homes will sell first and for most. This doesn’t necessarily require a huge investment.
Call me for help with your buying or selling game plan. It’s what I do. Best.