Orange County Housing Report: The Government Will Fuel Demand
November 26, 2008
Good Afternoon!
Now that the financial markets are frozen, the Federal Reserve has stepped in and will buy mortgage-backed securities to the tune of $500 billion. Almost immediately, rates dropped by about a half of a percent. As a result, more and more buyers will take advantage of rates and GOBBLE up homes right here in Orange County. Since the economy has put on the brakes as a direct result of the financial crunch and housing market, the government is poised to step in and do just about whatever it takes to get the economy back on track. The fundamental key to fixing the economy is to fix the lending crisis. We have moved from a subprime meltdown, March 2007, to a financial crunch, August 2007, to a completely frozen financial system, October 2008. The problem is that there are very few investors willing to purchase "pools of loans" on the secondary market. The financial system depends upon this. Even though current "pools" have real quality loans where borrowers actually have to qualify for the loan, nobody is stepping up to invest. The problem is that these investment pools had been rated by a few different companies and their rating systems were inaccurate and flawed. So, investors do not know who to trust at this point, and nobody has properly invested in the secondary markets. This is one crisis that is just not willing to work itself out without government support. With the government stepping in to purchase the mortgage-backed securities, suddenly rates dropped to the lowest level of the year. This is perfect timing if you are a buyer about to purchase. This is the first of many steps that the Federal Reserve, the U.S. Treasury and Congress will take to get our economy back on track. President-elect Obama has surrounded himself with a lot of talent in the past couple of weeks to address the current economy. America voted for change, and that is exactly what America is going to get. We can expect there to be sweeping changes reminiscent of Franklin D. Roosevelt. There will be programs to abate foreclosures and unemployment. There will be programs to encourage buyers to purchase in today's housing market. So, change is in the air and Orange County housing will be a direct beneficiary. This may take a several months to totally trickle down to housing, but some of the programs, like what the Federal Reserve did earlier this week, will have an immediate noticeable impact. Let's put a half point rate drop in proper perspective. Dropping from 6% to 5.5%, a buyer would save $158.55 per month, or $1,902.60 per year, with a $500,000 loan. Put in another way, the payment for a $500,000 loan at 6% is the same as the payment for a $528,000 loan at 5.5%. So, a buyer that had been looking at a loan of $500,000 could either pocket the savings or look at spending about $28,000 more with no effective change in their mortgage payment.
So, how do the numbers look? It is too soon to see the impact of the change in rates on demand. This change comes in the midst of the Holiday market, the slowest season for Orange County housing. The impact may not be felt until the end of January, the beginning of the Spring market. Current demand, the number of new pending sales within the prior month, dropped by 111 homes in the past two weeks to 2,446. Last year at this time, though, there were only 1,243 pending sales, 49% fewer. Two years ago there were 531 fewer pending sales, a 22% difference. The total active inventory is now at 12,947 homes after dropping by 311 homes in the prior two weeks. Last year there were 3,822 additional homes on the market and 625 additional homes two years ago. The expected market time is currently at 5.29 months, a small increase from 5.18 months two weeks ago. Last year the expected market time was at 13.49 months and 7.09 months two years ago. There are now 5,795 distressed homes on the market, foreclosures and short sales, a drop of 6 homes in two weeks. Last year there were 3,525 distressed homes on the market, 2,270 fewer. The difference is that the today's distressed inventory has been at a plateau since June. Last year at this time the distressed inventory was rapidly increasing. In November 2007 alone, the distressed inventory increased by more than 500 homes. 78% of all distressed homes are below $500,000, compared to 63% a year ago. 93% of all distressed properties are found below $750,000, the same as 2007. The distressed inventory represents 45% of the total active inventory and 66% of demand versus 21% and 26% respectively one year ago. Back in June of this year the distressed inventory represented 40% of the active inventory and 49% of demand. There were actually 103 additional distressed homes on the market and 123 additional distressed homes embedded within demand. The big difference currently is that we are in the throes of the Holiday market and there are fewer discretionary home sellers, sellers with equity in their homes, on the market. Discretionary sellers don't have to sell. They have a choice and would rather enjoy the holidays.
So, if you are a buyer, how should you approach this market? My educated bet is that the government's comprehensive attention to the economy, financing, foreclosures and housing will have a significant impact on the Orange County housing market. Factoring in Obama's New Deal after he takes his oath of office in January and factoring in the delay in implementation, I am actually going to call a bottom in the market at around June 2009. It could come even sooner, time will tell. I am certain the doomsayers, a.k.a. the "bloggers," will eat me alive, but the fundamental ingredients are all there: robust activity in homes below $500,000, lower interest rates, home affordability at levels not seen in years, more government programs to come. The below $500,000 range is significant as it represents 70% of the active inventory. Also, it is important to note that the lower ranges always lead in a housing market recovery. Home prices have already completed a majority of their movement. From August 2007 through February 2008, prices dropped between 3 to 5% per month. Now, they are on pace to drop between ½% to 1%, but will stop and plateau in about six months. So, if you are a buyer willing and able to stay in your home for the next several years, be assured that your investment in your home will more than pay off. Many discount the notion that we will ever return to rapid appreciation, but in markets like today, prices often drop below the "true" bottom as "would be" buyers hesitate and sit the market out until they are assured that the "water is perfect." Yes, I am saying that current pricing is below where pricing really should be. This will be proven out in a couple of years from now after everybody is properly informed that the market bottomed out a while ago. Economists and experts alike can never tell you precisely when a bottom is occurring; instead, after there is months of data, they will establish that a bottom occurred somewhere in the past. For the first year after a bottom is called, buyers will be skeptical and sit the market out, waiting for the "herd." After many buyers enter the market, the new "herd mentality" of our economy will ignite a wave of buying that will drive demand through the roof and we will realize rapid appreciation once again. The naysayers can chime in again and point to charts, experts and economists that state the opposite, but nobody is picking up on the newest element of our current economy, the "herd mentality." If you need proof, take a look at Wall Street over the past month and a half. The swings up and down are unprecedented. There is no rush right now, but if I were a buyer, I would isolate the perfect home for my family right now. Do not be afraid to the pull the trigger. Even if prices drop a few percentage points more, know that in the long run you will do fine. Orange County housing is an excellent long term investment and much better than stocks and bonds. Be very aware that in arriving at price, the average sales to list price ratio for all of Orange County is 97% and for foreclosures it is 101%. If you are contemplating writing an offer at 90% of the asking price, be assured that the data is not in your favor and that the chance that your are wasting everybody's time and paper is rather significant.
So, if you are a seller, how should you approach the market? Unfortunately I have already heard of sellers willing to wait for the government to step in to fix the housing market. As a seller, if you have to sell within the next 18 to 24 months, you are not sitting in as good of a position as buyers. Sellers that have the ability to sit on the sidelines longer will be fine. So, even though we are in the midst of a Holiday market, if you have to sell, price your home according to the market value, or slightly below, and have your home ready to show each and every day, from day 1 to day 101. As a seller you never know when the buyer of your home is going to walk through your door, so be ready. In arriving at price, be acutely aware of your location and condition. Are there power lines nearby? Can you hear street traffic from your home? Is your home in perfect move-in condition? Remember, with so many homes on the market, competition is fierce and if two homes are identical, but one has a better location, that is the home that will always sell first. As a seller, carefully choose the agent that is going to represent you in the sale of your home. It's not about price; it's about experience and knowledge to help navigate through the challenging housing market. It is not brand that will sell your home. It is not the "area expert" that will sell your home. It is not the licensed friend or family member that will sell your home. To be successful in this market, you need an actual expert in real estate. Somebody that knows the local market inside and out with data, a proven track record and experience. This is the market where the agent interview is the most important element in selling your home. So, interview carefully and do not jump to a quick decision. I personally know of an individual who went with the "subdivision" expert over the "market "expert to save in commission dollars. He sold the home with the subdivision expert after 14 months on the market and $250,000 in price reductions. Had he paid a few thousand dollars more and hired the market expert, he would have netted an additional $140,000. The moral to the story: if you are a buyer or seller, hire an expert to best represent your family.
Have a wonderful Thanksgiving weekend.
Sincerely,
Steven Thomas
Altera Real Estate
President
Quantitative Economics and Decision Sciences, B.A.
"Pride Begins at Home"
Office 949.389.7816
Cell 949.874.8221
www.AlteraProperties.com
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