Yup. Summer’s over.
OC real estate sales volume peaked in May this year. In spite of the scorching heatwave, technically summer never even happened.
What does this mean?
Nothing much. There won’t be a dramatic crash with the bottom falling out. Nor will there be a sudden restart with prices and sold units skyrocketing up out of nowhere. Nope, the remainder of this year should be just as uneventful as summer was.
Here’s what has happened so far.
Higher median prices are confusing everyone. Rising values have caused the available pool of lowest priced homes to slowly disappear. Thus, fewer buyers are able to find an affordable home to buy and fewer homes have sold overall. Because fewer of the lowest priced homes sold, the County’s median price increased.
Some mistakenly interpret the increased median price as a sign of greater buyer ability and appetite for higher prices. If the same or more housing units had sold, that might have been the case. But they didn’t. And it’s not. It’s a reflection of lack of inventory in the price ranges where there is still greatest demand. Since 2012, the total number of home sales priced below $700,000 has slowly fallen, with only a small portion of sales moving into higher price ranges.
This year is tracking at 10% fewer total homes sold than in the prior six years. Clearly fewer buyers can afford to pay more.
The charts below illustrate that 34% of all homes sold in OC were priced below $700,000, in spite of additional available inventory at higher prices. Buyers are not increasing their purchase prices by much, if at all, in spite of limited housing supply. They can’t afford what they can’t afford. Period.
Here’s what’s coming.
Sellers need to pay attention if they really want to sell. Interest rates are rising and at least one more rate increase is promised before year end. This will further impede buyers’ ability to qualify for financing, particularly in the lowest price ranges. If you own property valued at $700,000 or less, now is definitely the time to sell at current market value. Holding out for a higher price is not smart when buyer payments are definitely increasing whether or not your value does.
Panicked buyers will derail their own destinies. Buyers will not suddenly rush the market and buy more homes fueled by the specter of higher interest rates – even though they really should. Those already motivated to buy will certainly be more motivated to get into escrow sooner than later. Many more buyers, sadly, will wait on the sidelines hoping that prices will fall enough to balance out increasing interest rates. They won’t.
Tragically, buyers are misinterpreting reports about fewer homes selling this year as a sign of price instability, and they’re asking me if they should wait a year or more for prices to come back down. Of course this is foolish and I tell them so. But if enough buyers decide to wait it out, they could actually impact the market and cause prices to artificially cool, in spite of severely limited inventory.
More bad news for hesitant buyers is higher lease rates. OC population has grown slowly and steadily. Home building and resales have not kept pace with this growth. There are quite literally more people competing for fewer homes. You do the math.
The 5-7% annual rate of appreciation is over – at least for now. Price appreciation should slow down as interest rates rise and buyers start to freak out. Interest rates have been kept artificially low for an unprecedented 9 years. General consensus is that mortgage rates will continue to rise until they settle at a sustained average of between 5-6% going forward.
Price erosion is incredibly unlikely in the short term, no matter how much buyers object to this fact. There is simply not enough market activity to indicate a tipping point, nor are buyers pushing themselves to the extreme top of their buying power, risking default.
Banks and buyers alike have learned something from 2008. In 2005 more than 41,000 homes were sold in Orange County. Home sales suddenly fell by half in 2007 and 2008, when buyers could no longer get financing.
Prices and units sold started to rebound in 2009. Since then the annual volume of sales has consistently hovered around 30,000 homes (27% fewer than at the peak), until this year which I expect will close with < 27,000 total homes sold (down roughly another 10%). As already stated, this is a reaction to price acceleration and higher costs to finance.
It is NOT 2008 all over again.
I don’t expect Buyers to believe me. So get ready for a very real “tug of war” as buyers and sellers creatively twist market data to match their opposing expectations. This will have no impact on reality. The reality is this. Prices have slowly risen faster than incomes have and interest rates are also rising. This will cool price appreciation and possibly also the number of homes sold, maybe for another year or so. Prices may flatten for a time, but should not fall.
Some petulant buyers will sit it out for 3-6 months, until they tire of paying more in rent and become irritated with higher mortgage interest rates, then they’ll reluctantly throw in the towel and start buying homes again. Sellers will soon be disappointed that they are not selling for more than their neighbors did in the prior year. They should have sold sooner. Greed doesn’t always pay.
Only the coolest heads will prevail. (I foresee a massive surge in yoga memberships.) He who negotiates price and terms most elegantly will win.
Call me when you want to win. It’s what I do.