Orange County California Market Time Report - 04/17/08

Real Estate Agent

Market Time Report:  First Time Home Buyers are Back

April 17, 2008

Current housing demand continues to outpace last year and the reemergence of first time home buyers is a major factor.  If you listen to or read all the recent reports regarding "sold" statistics for March, one would quickly come to the conclusion that the real estate market is continuing to sputter along at a slow pace.  However, this could not be further from the truth.  Sold activity is a snapshot of the past, about a month and a half in the past to be precise.  So, March "sold" statistics are really a snapshot of the second half of January through the first half of February.  The market did improve during that time but was still extremely anemic as demand, a snapshot of the prior 30 days of escrow activity, grew from 989 escrows in mid-January to 1,630 escrows in mid-February, a gain of 641 escrows.  Since then demand has continuously grown to its current height of 2,374 escrows.  Last year at this time demand was at 1,925 escrows, 449 fewer than today.  This recent escrow activity will translate to sold data reported in the months to come.  The big story will be that the year over year sold statistics will be better for the first time since the Autumn of 2005.  Demand already crossed that threshold two weeks ago.  Some skeptics attempt to discount the uptick in demand, claiming that many will fall out of escrow.  That is simply not statistically true.  The data does not support their claim.  Yes, some escrows do fall out; however, the snapshot of 30 day escrow activity misses some escrows that have already closed because they were less than 30 day escrows.  The average escrow is about 45 days, but we do have one, two and three week escrows that won't show up in the data for long.  So, the less than 30 day escrows offset most escrows that fall out.  The bottom line: the market is improving.  Market time has dropped from 15.6 months at the beginning of the year to 6.55 months today, not as deep of a buyer's market.  The active inventory grew by only 82 homes in the past two weeks to 15,556 homes.  The active inventory has not changed much this year and has actually dropped by 61 homes over the past month.  Last year at this time the active inventory was only 745 homes fewer homes than today and it was growing at a rate of 700 homes every two weeks. 

The majority of the upswing in demand is in the lower ranges.  Our agents in the trenches are unanimously reporting that there is a large wave of first time home buyer activity.  First time home buyers had been priced out of the market and dwindled in numbers during the last couple years of the housing boom.  But, prices have finally fallen to a point where they can now afford to purchase and that is precisely what they are doing.  One year ago there were only 408 condominiums priced below $250,000 compared to 1,263 today, more than triple. One year ago there were only 343 detached homes priced below $500,000 compared to 2,848 today, more than eight times.  The market time for detached homes below $500,000 is at 4.61 months, a slight seller's market.  It is not a coincidence that 75.7% of all condominiums and detached homes below $500,000 are either a foreclosure or a short sale.  This fact has provided many opportunities for first time home buyers to finally enter the market.  The first time home buyer activity is the seeds to the rebirth of the Orange County housing market.  That does not mean that the market is going to right itself overnight.  But, it is the first positive step in the recovery process.  It was the lower ranges that were hit hard last March with the beginning of the subprime meltdown and it makes sense that it would be the first to take a step in the right direction.  Many homes and condominiums in the lower ranges are receiving multiple offers.  Foreclosures and short sales are not only securing multiple offers, they are closing above their asking price.

The upper ranges remain sluggish due to the financial crunch.  The financial system is still not functioning properly.  Lenders are still having liquidity issues and their lending requirements and interest rates for loans in the upper ranges are too rigid and are deeply cutting into demand.  For example, the market time for homes priced between $1 million and $1.5 million is 10.89 months compared to 7.47 months one year ago.  The upper ranges will remain sluggish until the financial markets start buying pools of mortgages once again.  Since the beginning of the financial crunch in August of 2007, the financial markets have refused to buy any pools of mortgages.  But, there are some signs that their appetite has been growing.  First, a major national lender attempted to sell a pool of only the best of the best loans at the end of January, but the financial markets would only purchase them for a discount.  They repeated their effort in March and the financial markets bought it at "par."  The logjam in the financial markets should begin to ease by the end of the third quarter, as will the disparity between conventional loans up to $417,000 and the new loan limit of $729,750, as well as jumbo loans above $729,750.  Currently, there are three tiers of mortgages.  The cheapest rates are for loans below the old conventional loan limit of $417,000.  Rates for loans between the old conventional limit and the new $729,750 limit are three-quarters of a point higher.  And, lenders tack on an additional three quarters of a point for loans above the new limit.  As the financial markets' appetite for pools of loans increases, these disparities will begin to diminish.  This will be the second big positive step towards recovery.  At that point, demand at the upper end of the Orange County real estate market will increase.

Buyers, what to do?  First, it totally depends upon the area and price range on the approach.  Naturally, in dealing with foreclosures, short sales and the lower ranges, be prepared for much more competition than any headlines would lead you to believe.  There is a strong probability that you will be competing with other buyers in writing an offer on a home.  In some cases it will take an offer to purchase above the asking price to secure a home.  Due to the sluggishness in the upper ranges, buyers are more in control of their destiny with less competition.  For those buyers looking for a deal in the higher ranges, keep in mind that only 5.7% of all distressed homes, foreclosures and short sales, are found above $750,000.  Be prepared for increased activity on these properties too because every buyer is looking for a "deal."  Also, it is important to point out that lenders are in the driver's seat when it comes to foreclosures.  Currently, the market time for foreclosures is 2.05 months, a deep seller's market.  It is important to point out that the low interest rates should remain intact throughout 2008, but pressure is mounting for the Federal Reserve to raise rates as they grow more concerned about an increase in inflation.  Rates have been favorable for a long time, but do not get comfortable with today's interest rates, they WILL eventually increase.  As soon as the economy starts humming along again, expect the Federal Reserve to reverse course and push rates up higher.  By the way, for every 1% that interest rates increase, it erases approximately all of the benefits of waiting for property values to decrease 10%.  The payments are virtually identical. 

Sellers, what to do?  It is extremely difficult to navigate in the current Orange County real estate market.  Now more than ever it is essential to have an experienced Realtor® guide you throughout the process.  There are numerous variables and market changes to continuously watch for: area short sales, foreclosures, local trends, detached versus attached pricing, etc.  Be prepared to constantly reevaluate your pricing position within the market.  The key ingredients to a successful sale are an excellent price and excellent condition.  In arriving at price, the condition and location increase or decrease the market value.  This market can also test a seller's patience and you must be as prepared for a showing on day 120 as you were the first week.  Stage your home for success: turn all the lights on, have soft music playing in the background, open all of the shutters and blinds to allow in natural light, turn on the air conditioning on hot days, box up and store all clutter and your home should be neat as a pin from top to bottom. 

Please feel free to contact THE HOOPER GROUP with any questions or real estate needs at: 

(949) 389-7853 or visit