Market Time Report: Demand Up 121% Since January 1st
March 24, 2008
Good Afternoon!
Since the beginning of the year, the market has dramatically improved: demand is up, the active inventory is not growing uncontrollably and expected market time has dropped substantially. Let's dive right into the numbers for further explanation. At the beginning of the year, demand, a snapshot of the last 30 days of escrow activity, was at 944 escrows. Today, demand has increased by an additional 1,139 escrows to 2,083. The change in demand is like being stuck in bumper to bumper traffic and then suddenly, without explanation, everybody is moving at the speed limit. Demand is the real story here. Even with the liquidity issues, buyers are starting to pour back into the market, especially in the lower ranges where buyers are not affected by the financial crunch. It is still really challenging and more expensive to obtain a loan above the $417,000 conventional limit; BUT, that is changing right NOW. Lenders are scrambling in preparation for the new conventional and the FHA loan limits of $729,750, which are just beginning to hit the market. The new loan limits will have a profound impact on demand. At 10% down, the old $417,000 limit only covers 37% of the current active inventory. The new limits now encompass a staggering 75% of the inventory. And, for those consumers with some credit blemishes and/or a small down payment, the FHA allows 3% down, all of which can be a gift. It is important to clarify that the FHA is NOT subprime and has been around for years. The only reason it was not in vogue before is because the Federal Housing Administration refused to adjust the limit beyond its $367,000 level for high cost areas. At that level, only 23% of the current inventory could be purchased with an FHA loan. It took a crisis for everybody to see the light. A lot of this mess could have been avoided with higher FHA loan limits all along. Needless to say, there will be reverberations in the local housing market, which translates to increased demand.
So, how do the numbers look right now? Demand increased by from 1,893 escrows just two weeks ago to 2,083 today. We have not seen demand like this since the beginning of April in 2007. The active inventory increased in two weeks by 205 to 15,617 homes. Expected market time improved from 8.14 months to 7.50 months. It is still a buyer's market, just not nearly as deep as the 15.60 month market at the beginning of the year. Current demand at 2,083 escrows is just 112 fewer compared to just one year ago. The inventory last year was at 13,373 homes and market time was at 6.09 months. But, the difference is that last year demand was dropping and both the inventory and market time were rapidly climbing due to the subprime meltdown. On the other hand, this year the market has been improving incrementally every day with increased demand and not as many homeowners placing their homes on the market for the first time. It will not be long before year over year comparisons in demand will be better this year. Bank owned foreclosures and short sales, homeowners that owe more on their home than the current value, now account for 33.4% of the active inventory. Lenders remain in the driver's seat with a 2.11 month market. For buyers looking for a "deal" in purchasing a foreclosure, be prepared to compete with other buyers. Many foreclosures are being sold for their full prices. I just heard from an associate who wrote two offers for one buyer this week and they lost out on both of them because the buyer was unwilling to pay the full asking price. Statistically, short sales have an expected market time of 12.05 months. HOWEVER, I must warn everybody that this figure is grossly understated. The standard practice for Realtors® out in the field is to keep a home on the market as an active listing even though they have an offer that has been accepted by the seller until they have formal lender approval of the deal. Because the lender must take less than what is owed, short sales are "subject to lender approval." So, when a buyer climbs into a car and finds a short sale home that they want to write an offer on, chances are that the home already has an accepted offer that is somewhere in the "lender approval" process. This process can take anywhere from a couple of weeks to months. These homes are not placed into the Multiple Listing Service as a Pending Sale because the agent and seller are willing to take a look at additional offers that may be more acceptable to a lender, typically a higher offer price.
What's the difference between the condominium market and the detached home market? The detached home market continues to fare better than the condominium market with a 7.23 month inventory. For condominiums, there is a 7.98 month inventory, the first time below the eight month mark since April of 2007. 31% of the detached home inventory and 38% of the condominium inventory is either a foreclosure or short sale. 67% of all detached homes below $500,000 are either a foreclosure or short sale. For condominiums, 47% below $250,000 are distressed and 43% between $250,000 and $500,000 are distressed.
Buyers, what to do? According to a CNN Money article titled "Housing: Best Time to Buy in Four Years," housing has nearly returned to "long-term norms" and that by the end of 2008 "housing markets could be broadly undervalued." Slowly but surely, more and more headlines and articles are touching upon the fact that values have come down so rapidly that they are creating excellent buying opportunities not seen in years. Increasing demand in Orange County can definitely be attributed to value. The good news is conditions are perfect to purchase: motivated sellers, a lot of inventory, rates are low, new loan programs are available and there are great values out there right now. Buyers need to understand the local conditions and the price range that they are looking at prior to writing their first offer. In more and more areas, certain price ranges and individual homes can and will attract multiple offers and above asking price offers. Understanding the market conditions is fundamental to isolating a home. Everybody is so focused on price and value that changes in interest rates are almost completely ignored. Buyers rarely focus on a difference in interest rates. Buyers can ask for a seller to pay a point of their loan and their monthly mortgage payment drops for the life of the loan. Also, rates will inevitably increase to stave off inflation. Just as Bernanke and the Federal Reserve are doing everything in their power to increase liquidity in the financial markets, they will just as swiftly and methodically increase rates. Although we have all grown accustomed to rates staying so low, like gasoline, we will get used to rates increased to 7% or 8% or more when the time comes. In 2000, conventional rates were 8% and in 1990 they were at 10%. 71% of distressed properties are below $500,000 and 92% are below $750,000.
Sellers, what to do? So far I am pleased that most homeowners have not been fooled into placing their homes on the market with the anticipation that it is the Spring market. Here's a dose of perspective, given current demand, there are still 13,534 sellers who will not be successful in selling their homes over the course of the next month. With only 2,083 successes over the past month, that leaves the vast majority waiting another month or months. So, if you do not have to sell your home, DON'T. Placing your home on the market takes a ton of patience, a lot of elbow grease, a very good price, and tip top condition. The more upgrades, the better condition and the better the location, the higher a seller's chances of successfully selling. If a home does not have the upgrades or is in need of work or does not show well, it must be reflected in the price. With the market flooded with so many foreclosures and short sales, a homeowner can compete and achieve a better price by having the best home in the best condition with upgrades that show beautifully. Be prepared on day 90 with the lights on, music playing in the background and the faint smell of cinnamon cookies in the air. You never know when the buyer that falls in love with your home is going to walk through the door.
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