We’re now actually at an almost perfect balance. It’s neither a buyer’s nor a seller’s market.
Yet people seem deeply troubled by OC’s sluggish real estate activity, which appears to have more to do with ambiguous media reports, than any hard evidence to the contrary. We all have to live somewhere. From that perspective, it’s more stable than most investments.
We haven’t seen a normal market in so long it just seems odd.
Overall things look good and experts are downplaying the risk of a near-term recession.
Dr. Mira Farka from Cal State Fullerton says, even though “we’re climbing up a wall of worries about rate hikes, global growth, government shutdowns, and the tumultuous political environment, this doesn’t mean we’re headed into the next recession just yet.” Farka thinks we’re straddling somewhere between a mid and late-phase market cycle.
Her view is informed by a variety of leading indicators such as Financial Stress Index, Consumer Confidence, the Fed Survey (which asks banks if they’re tightening their standards – and they’re not), Manufacturing Index, and Jobless claims. Of these she says,
“None of these is actually indicating a recession is imminent.”
Wall Street’s Q3 survey also showed that only 10% of economists think a recession is coming in 2019.
However Farka points out, “The markets have been wrong in the past.” If we look back historically since WWII, there have been about 12 market corrections like we’re experiencing now. Of these, six did not lead to a recession. As an indicator, this has been wrong half of the time. “So take it with a grain of salt.”
“None of the post-war expansions died in bed of old age. They were all murdered by the Fed.”
But how do things end? Farka says, “It would be instructive to look at ways expansion could keel over and die, such as overheating which leads to policy mistakes – a vicious cycle that starts with accelerating growth, a tight labor market and then, because the economy is overheating, the Fed puts on the brakes and eventually it tips the economy into a recession.”
Another is financial imbalances. It happened in the housing crisis and in the tech boom of the ’90s. But you usually see a rise in debt burdens, a rise in equity markets and Fed tightening. Then, the bubble bursts and the economy tips into a recession.
“The economic Swan Song always ends with the Fed, right?”
Per Farka, “We do see that there is a bit more room to run in this business cycle. There is still some slack. If you look at some of the labor numbers or indicators, like involuntary part-time people who want to work full time, if in an overheating economy we’d reach about 2.2 – 2.3% of the labor force in this category. Right now, we’re at about 2.7% There’s a number who can still work full time. Same goes for discouraged workers and Disability Rolls. These roll back into the labor force.”
Inflation expectations are thus pretty well contained. Another reason expansions die, is excessive debt levels or excessive financial imbalances. We don’t see huge imbalances today.
“The banking sector is doing well, too,” she says. “There’s no sign of a credit bubble. If you think about irrational exuberance from consumers, which often happens at this point, and you review the average savings rate, it turns out consumers have saved considerably more during this expansion than we previously thought – 6% versus 3.4% as previously reported. Household debt is back line with historic norms.”
“Housing wealth has gone up,” says Farka. “Homeowner equity is at $58 trillion in aggregate which is $1.8 trillion more than in ’05 and ’06. This matters because housing wealth is more broad-based, affecting the middle class more than traditional financial wealth indicators. Housing is in good shape.”
“Housing is in recession already. It might not get better soon, but it probably won’t get worse.”
said Edward Leamer, an economics professor at UCLA when asked about the threat of recession. “The overall message is that builders cannot build homes at the prices people want in the places people want them, so they aren’t building much at all. The result is that the housing sector — the residential construction components of GDP, taken together — accounted for only 3.9% of the economy in the third quarter and has helped drag down overall economic output for three quarters.
“How does housing look now?” he stated, “Mixed, but mixed in such a way that the things most important to economic growth are the most stable.”
Locally this translates to a population with healthy employment, greater savings and home equity growth than in a decade and still fewer homes to buy. It’s a recipe for housing price stability.
Here’s our local real estate reality:
Per quantitative economist Steven Thomas, there are 51% more homes available for sale today. This is the highest level of homes on the market for this time of the year since 2012. That is not because suddenly homeowners are deciding to sell. In fact, the number of homeowners coming on the market is slightly less this year. Instead, the higher inventory is due to muted demand, a result of rising interest rates.
While inventory has only increased by 3% in the most recent weeks, demand has swelled by 17%. So things should start to get interesting.
Even with increased demand, it is important to note that the current reading is the lowest for this time of the year since 2008. It will continue to be muted compared to recent years unless interest rates drop to 4% or below. Most doubt this will happen.
The current Expected Market Time dropped from 102 to 90 days in the past two weeks – a balanced market.
Homes priced below $1.25 million remain the standouts with an average Market Time of 79 days. However, my most recent listing priced at $1.25 million received multiple offers within 72 hours and closed escrow (above asking price) within only 35 days. This illustrates how one cannot allow average market statistics to drive a purchase decision.
If you find a home you love, do not assume you have leverage and can negotiate the price down. There is still serious competition for the best homes. Location and condition still matter greatly.
More buyers compete for homes priced $750K – $1MM than in any other price range.
This is also our local average price. The lowest price ranges have less competition and are dominated by age-restricted (senior) communities, homes on leased land and those in less desirable areas where nuisances like freeway interchanges or challenging commute corridors make them less appealing to the average audience. And of course there are equally fewer buyers for the most expensive homes.
What’s hot and what’s not?
The inland communities of Dove Canyon and Rancho Santa Margarita seem to be the best current targets for buyers, where there is some slack in home sales. Sellers are gaining control in Corona Del Mar, Costa Mesa, Huntington Beach, Los Alamitos, and Villa Park where demand is starting to outpace supply.
Sellers, get homes in these areas on the market NOW.
Buyers looking for the best investments should focus on areas with strong future development, such as Costa Mesa, Long Beach, and Buena Park. But hurry! I’m not the only smart person around. These areas are already starting to see price acceleration. Act NOW!
- Orange County is not headed into a recession yet.
- Housing prices will remain stable and in some areas will appreciate 1-3% this year.
- Inventory will rise but nowhere near prior levels. Buyers, although cautious, are still out there.
- Buyers will continue to wait for mortgage rates to fall, which is unlikely, and a stupid reason not to buy a home if it’s “the one.”
It’s possible to make incredibly savvy real estate decisions today. Call me – I’ll show you how.