Orange County’s extra-long, hot summer season flung itself over a cliff in November with a dramatic 10% decrease in sales from October. The month also closed with 4% fewer sales than at the same time last year. But there’s no need for panic — overall our annual trend looks pretty ordinary. As I mentioned in my last report, the rate of sales didn’t taper off in Fall as we expected. So this abrupt correction put things right back on track.
Over the prior four years, we have enjoyed a year-end last hurrah, if you will. December has consistently ended with more closed sales than in November. December 2012 closed with 5% more sales than the month prior, 2013 with 10% more sales, 2014 with 14% and 2015 had an astonishing 27% more closed sales in December than in November. Remember, statistically, sales closing this month will have entered the market in September.
We’ll have to wait to see what happens as this year wraps up.
If you’re looking to sell, put your home on the market right NOW and price it according to the most recent sales. You should close escrow by Valentine’s Day. If you need to get it sold this year, you may want to offer higher than average commission to the selling agents and price it below the most recent comparable sales. If you’re lucky enough to be selling in Aliso Viejo, Lake Forest or Portola Hills, you’ll likely close in January if you list right now. These areas are hot, hot, HOT.
Buyers still need to remember that sellers are neither stupid nor crazy. Just because there are now 16% fewer buyers in the market does not mean that you are in the driver’s seat and can demand deep discounts. Sellers won’t fall for it. Instead, they’ll pull their homes off the market and wait for the market to reheat in 2017. 20% of them have already done exactly that. While there are fewer buyers at the moment, there are even fewer homes available to buy. It’s a typical seasonal adjustment. So get ready to get real. You still have competition.
If the past is any indication of what we can expect as we close out 2016, it’s relevant to consider the prior December rate of sales. In 2015, it took an average of 81 days to sell any home in Orange County, which is less than our historical average of 90-110 days. In the previous three years from 2014 to 2012, the average was 31 days, 95 days and 47 days, respectively.
Presumably, this year is most like 2012 — the last election year. However, per Freddie Mac, 30 year fixed mortgage rates in December 2012 were 3.35% with an average of .7 Point cost versus today’s average rate of 4.08% with .5 Point cost. This higher relative rate may spur buyers to hurry up and buy now before rates move even higher, or it may cause them to postpone purchases, hoping for rates to fall again. (Click here to see Freddie Mac’s historical record of 30 year mortgage rates.) In any case, we can safely assume the super low rates in 2012 were the impetus for many of those sales.
Something else to consider when analyzing any real estate market is how many people are likely to buy homes at all. We’re seeing a steady increase in multi-generational homes. This trend is occurring for two reasons: the massive aging population of Baby Boomers needing daily live-in help, and the high unemployment/underemployment rate of college graduates who therefore cannot yet afford to live on their own.
This is having two significant impacts on the housing market. First, many homeowners are choosing not to sell at all, instead opting to stay put as relatives move in with them. This has the effect of extending the average number of years between home resales. The second impact is that families are selling off multiple homes to move into one larger home — thereby disrupting the normal sell/buy cycle.
According to Sean Beckett, Economist and VP at Freddie Mac, US homeownership rates peaked in 2004 at 69%. This rate fell 4% after the market crashed. Experts at the Harvard Joint Center for Housing Studies and the Urban Institute anticipate further declines in the homeownership rate in the next few decades. According to these projections, it is possible that homeownership rates may fall below 60 percent within 20 years.
This decline in the homeownership rate matters because it represents a gross adjustment of roughly 10% fewer Americans owning homes. This, however, is not necessarily bad news. With continued population growth approximately offsetting this decline, the net effect will most likely be a static, flat growth rate.
As you look forward, there is one other factor to consider. Many people are looking for creative ways to boost their income. With steadily rising rents, more and more people are turning to investments in real estate rentals as a means of additional monthly income.
The USC Casden Multifamily Forecast projects, “The average rent in Los Angeles County is expected to hit $1,416 a month in 2018, an 8.3% jump, while in Orange County, average rents are likely to rise 9.4% to an average of $1,736.” The projections come even as developers continue to build. Where else can you get a 9.4% increase in your investment, as well as equity growth in the real estate asset itself?
My prediction for the remaining few weeks of 2016 is that we’ll have 5-6% more sales than we had in November and that 35-38% of those sales will be non-owner occupied sales. Prices should be pretty flat. And because more of the buying population for lower priced homes in 2017 is likely to be investors, I plan to adjust my marketing strategy to attract those clients, focusing on the potential rental income, community amenities, proximity to schools and commute corridors. Let’s see if I’m right.