The active distressed inventory, both foreclosures and short sales, has dropped by 56% since reaching its peak last summer. Based upon reports of the “next wave” of foreclosures the distressed inventory was to increase for the past couple of months. But, the wave just has not materialized yet. The distressed inventory dropped by another 150 homes in the past two weeks, bringing the total to 2,616 active on the market today. It now represents 29% of the overall active inventory versus 40% one year ago. It is 3,334 less than the peak of 5,950 on August 7, 2008. Back then there were 1,249 foreclosures within the active listing inventory. Today, that number has dropped to 331. Demand, the number of new pendings sales within the last month, for foreclosures is currently at 614, compared to 861 last year. The problem right now is that there is tremendous demand for foreclosures, just not enough new foreclosures hitting the market. The expected market time currently is .54 months, about two weeks, compared to 1.42 months last year. The rumor mill is rampant with reasons for the shortage of foreclosures: from lenders purposefully holding back their inventory to “it’s just a matter of time” to all of the new tenant foreclosure laws. The fact remains that the “next wave” just has not materialized. Another answer could lie in the fact that there are more short sales that are resulting in a pending sale. The active short sale inventory peaked in May of last year at 4,810. Today, there are 2,285 short sales within the active listing inventory, a 52% drop from its peak. The word on the street is that lenders are “just starting to get it.” That does not mean that all short sales result in a sale and that the process has been simplified. It indicates that a bit of the reluctance to put together a short sale, on the lender’s part, has been lifted. Demand for short sales is now at 1,139 pending sales compared to 549 one year ago. Expected market time has dropped from 8.52 one year ago to 2.01 months today. Clearly the market has changed considerably over the past year for both foreclosures and short sales. Demand, the number of new pending sales over the past month, dropped by only 53 homes over the past two weeks to 3,306, a 2% drop. Last year demand totaled 2,743 pending sales, 563 fewer than today. Two years ago there were 1,822, 1,484 fewer than today. The active inventory dropped slightly by 51 homes in the past two weeks to 8,895, a 1% drop. Last year the active inventory totaled 14,746 homes, 5,851 additional homes on the market compared to today. Two years ago the active inventory reached 17,596 homes, 8,701 additional homes compared to today. The expected market time for all homes in Orange County increased slightly over the past two weeks from 2.66 to 2.69 months. Last year the expected market time was 5.38 months and two years ago the expected market time was at 9.66 months. The total pending count, different than demand in that demand only tracks new pending sales over the past month, increased by 116 homes over the past two weeks to 6,519, its highest level since I began tracking the statistic back in 2007. Last year at this time the total pending count was at 4,192, 2,211 fewer than today. Two years ago there were 2,575, 3,944 fewer than today.

Fueled by the value and affordability of foreclosures and short sales, demand below $500,000 has swelled to its highest level of the year. Total Orange County demand now exceeds last year’s level by 63% and 2006’s level by 26%. Demand, the number of pending sales over the past month, increased by 197 in the past two weeks to 2,940. After unstoppable growth in the first half of 2008, demand is now following a typical summer cycle. For the first couple of weeks it diminished from June’s record highs and has continued to grow ever since. Typically, demand then starts to drop with the beginning of the Autumn market and the beginning of the school year. However, with the distressed inventory continuing to replenish, value and affordability may continue to provoke demand through the end of the year. Fence-sitters for the past couple of years, and even investors, are sensing a great opportunity to enter the market. 64% of demand, 1,892 pending sales, is found below $500,000, compared to 30%, 537 pending sales, one year ago. It is important to note that the beginning of the financial crunch took place in August 2007. As lenders tightened their requirements overnight, demand dropped by 18% in just two weeks and by 33% in a month. Demand dropped to a trickle and lasted six months. There will be no repeat this year. Value and affordability is a major difference in comparing 2008 to 2007, fueled by a major drop in prices due to that six month abyss. It will be interesting to see where Orange County demand travels from here. It may very well start doing its own thing just as it did at the beginning of the year, breaking from the traditional cycle of diminishing through the Autumn and Holiday markets and either sustaining its current levels or even increasing. Add value and affordability along with waiting on the fence for a few years and you have ingredients that will at the very least continue to spark demand.

The active listing inventory has shed 398 homes in the past two weeks, bringing it to the lowest level of the year, 14,358. The inventory continues to buck the trend of growing through the Spring and Summer markets. Instead, it has remained just below the 15,000 mark for most of 2008 until its recent drop, bringing it closer to the 14,000 threshold. Two things occurred since the beginning of the year: demand increased unabated and discretionary, non-distressed homeowners remained off the market and nobody tested the waters like prior years. Unlike 2006 and 2007, absent this year was any foolish anticipation of a phenomenal Spring market. 14,358 homes on the market is still high, but it is a lot less pressure on pricing and demand compared to 20,000 homes. Last year at this time the inventory had blossomed to 17,611, 19% higher compared to today, or 3,263 additional homes. Two years ago, the inventory had grown to 15,875, 10% higher, or 1,527 additional homes. The expected market time for Orange County dropped from 5.38 months two weeks ago to 4.88 months today. The expected market time in 2007 was 9.76 months, almost double, and in 2006 it was at 6.81 months.

The distressed home market, foreclosures and short sales, now accounts for 41% of the active inventory and 57% of demand. The distressed inventory grew by 56 additional homes in the past two weeks. An interesting statistic is the portion of distressed homes in the various ranges in comparison to a year ago. Last year 55% of all distressed homes were found below $500,000 and 92% were below $750,000. Today 78% of all distressed homes are located below $500,000 and 94% are below $750,000. It is easy to conclude that the distressed inventory is driving demand. As painful as the distressed inventory has been to pricing, that erosion in pricing has not only brought affordability and value back into the Orange County housing market, it has planted the seeds to an eventual housing recovery.

It is time, once again to clear up the misconception in the short sale market. Short sales occur when a seller can no longer afford their monthly obligations and their outstanding loan(s) exceed the current market value. The seller must be able to document that they truly have a hardship, that their total outgoing monthly bills exceed their monthly income and they do not have a large savings or other source of capital. When this occurs, the homeowner places their home on the market subject to lender approval. Even though the buyer and seller may agree upon price and terms, the pending sale does not close until formal lender approval (and in many cases, more than one lender). HOWEVER, this is where the misconception occurs: a majority of short sales are on the market as active listings even though they already have received an offer, and often multiple offers, and have submitted a ratified contract to the lender(s). They remain as active until they obtain formal lender approval. This is due to a contract that is signed by both the buyer and seller that allows the seller to continue to market the home until lender approval. Unfortunately, this process can take anywere from weeks to months. The end result, buyers encounter homes that already have had tremendous activity and generated many offers. In most cases, short sales are just as popular as foreclosures due to their affordability and value. There are 1,249 active foreclosures on the market and demand for them is at 1,034, representing an expected market time of 1.21 months. In comparison, there are 4,701 short sales on the market. With reported demand for short sales at 656 pending sales, the expected market time is at 7.17 months. This is grossly understated because so many go unreported. Thus, it is hard to navigate among all of the active short sales. The bottom line, expect a lot of competition and activity when dealing with both foreclosures AND short sales.

Total Pending Sales are now at 4,248, a decrease of 22 homes. Remember, this statistic is different than demand, which shows the prior month’s activity. These are TOTAL pending sales, including those that have been pending for months. Compared to last year, total pending sales are up 73%. The year over year discrepancy continues to grow. Four weeks ago, total pending sales were up 61% compared to 2007. The markets are moving in opposite directions. Last year, total pending sales reached only 2,461, 1,787 fewer. Current sold homes not only surpass 2007 levels, it now eclipses 2006 levels as well. The number of sold homes has continued to grow unabated ever since March. The trend is almost identical to demand, the only difference, an apparent 60-day lag in the sold numbers compared to demand.

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The financial crunch is still impacting liquidity in the upper ranges.  Demand is off by more than 30% compared to last year for all homes priced above $750,000.  With demand off in the upper ranges by more than 30%, do not be surprised when the media reports a significant year over year drop in the median sales price.  With the lower ranges hot and the upper ranges not, the median value will be much lower.  The average pending sales price a year ago was at $869,000 compared to $605,000 today.  This is partially due to the decline in prices, but it also has a lot to do with a major decline in demand in the upper ranges.  For the first three quarters of 2007, prior to the beginning of the financial crunch, the number of sales above $1 million in all of California was only off by 3% compared to the prior year.  For homes below $1 million, sales were off by almost 30%.  A month after the start of the financial crunch, September of 2007, sales above $1 million were down 26% compared to the prior year.  The upper ranges have been impacted ever since.   As liquidity is restored in the upper ranges, do not be surprised by an increase in demand in the upper ranges and an increase in the median sales price.

Remember, the conventional loan limit and FHA loan limit were both just raised to $729,750.  However, there are now three tiers of loan rates: the old conventional loan limit up to $417,000, $417,001 up to the new limit of $729,750 and then $729,751 on up.  The original intent was to expand the lower interest rates of conventional loans to higher ranges in areas with much higher prices, like Orange County.  Historically, major changes in federally backed loan programs were carefully put together for the better part of a year.  This time, the financial industry was given about a month to create and implement a significant change.  The credit markets are just now adapting to the new loans.  Part of that adaptation is the three tier system.  Until the entire secondary market becomes more comfortable with these changes, the discrepancy in interest rates between each tier will be sizeable.  There is about a three-quarter point differentiation between each tier.  As the market adapts to the new program and liquidity is restored in the financial markets with investors once again purchasing pools of loans, the discrepancy between the tiers will shrink to about a quarter of a point.  The experts are predicting that there will be considerable improvement by the end of the third quarter of this year, by the end of the summer.  Currently, for loans above $729,750, the interest rates, loan qualifications and down payment requirements are extreme barriers to entry.  That does not bode well for homes priced above $800,000, where the rate is approximately 1.5% above the $417,000 rate.  This has impacted the upper range dramatically.  All ranges above $1 million are experiencing market times above ten months; the higher the range, the higher the expected market time.  Not surprisingly, the areas in Orange County that are impacted with market times above ten months are Corona Del Mar, Coto de Caza, Laguna Beach, Newport Beach and Newport Coast.  These areas should all improve by the end of the summer with improvements in the financial markets.

The volume of distressed homes in the lower ranges has provided the fuel for the decline in pricing.  77% of all distressed properties are priced below $500,000 and 94% are priced below $750,000.  Short sales and foreclosures now make up 36% of the current active inventory versus 35% two weeks ago.  There are now 5,576 distressed properties on the market.  The overwhelming majority, 81%, are short sales, sellers with loan balances that exceed the current market value and are "subject to lender approval."   For short sales, there are currently 4,504 active listings and demand is at 544 escrows.  The expected market time is at 8.28 months, dropping from 9.86 months two weeks ago.  But, this statistic is extremely misleading, just ask a buyer searching for a home.  A large portion of the 4,504 active listings already have secured an offer on the property signed by both the buyer and seller, yet they remain active on the market.  The reason is that there is also a signed short sale agreement that allows the seller to continue to actively market their home until formal lender approval occurs.  This process takes anywhere from a couple of weeks to months.  Unfortunately, there is no way of knowing which short sale listings already have an agreed upon offer submitted to the bank other than contacting the listing agent directly for their verbal answer.  So, true demand in Orange County is actually understated.  The word on the street is that close to 50% of all active short sale listings already have an agreed upon offer submitted to the lender.  If those were to be truly changed to "pending escrow" status, the demand count would increase considerably, the inventory would drop and the market time would drop as well.  Unfortunately, not all short sales with offers submitted for lender approval are actually approved.  Roughly 1 out of 3 are accepted.  Many are rejected because they are priced too far under their true market value.  With increased demand comes more realistic pricing of short sales.  As this year progresses, expect the lender acceptance rate to grow closer to 1 out of 2.