Market Time Report: THE FIRST TIME HOME BUYER WAVE IS GROWING!
May 1, 2008
Compared to last year, demand is stronger, there are fewer homes on the market and the expected market time is much lower. The first time home buyer wave continues to grow and plant the seeds to an eventual recovery. The reports from the streets of Orange County are unanimous: first time home buyers are fueling a surge in activity that continues to flourish and has been steadily growing since the middle of February. Multiple offers in the lower ranges, homes priced below $500,000, are now quite common throughout Orange County. This chart illustrates how demand has not only surged past the 2007 level, but is quickly approaching the 2006 level. Until just four weeks ago, year over year demand had not been stronger than the prior year since September 2005, the beginning signs of the current slow cycle. Demand, a snapshot of the prior 30 days of escrow activity, has climbed by an additional 166 escrows in the past two weeks to 2,540. Last year at this time, demand was at 1,863 escrows, 677 fewer than today. Two years ago it was at 2,701, or 161 additional escrows.
The active listing inventory has remained steady in 2008. In the prior two weeks, the active inventory has dropped by 119 homes to 15,437. We started the year with 14,724 homes, 713 fewer than today, but that was after shedding 1,050 homes in December 2007 with sellers pulling their homes off the market for the holidays. Still, that only represents a 5% increase so far this year compared to a 37% increase in the inventory last year. Two years ago there were 3,481 fewer homes on the market; however, the inventory was growing at an extremely rapid rate in 2006. The inventory had already increased by 65% to this point and it continued to grow by another 34% until reaching its peak of 16,006 homes back in August 2006. Today, the active inventory has steadily remained just under 16,000 homes and appears as if it will continue along that path.
With steadily increasing demand and a stable active inventory, the expected market time has dropped like a rock. Starting this year with a market time of 15.6 months, a deep buyers market, the market time has improved to its lowest mark of the year to date at 6.08 months, a 61% drop. Last year the market time was at 8.33 months and climbing at an alarming rate that would spook any buyer considering purchasing. Two years ago the market time was at 4.43 months and climbing. By the end of June 2006, the market time had blossomed to 6.33 months.
So, it is safe to say that the Orange County housing market has definitely changed gears this year. The lower ranges and the flood of first time buyers are entirely responsible for this change. What changed? The answer is quite simple: the significant drop in prices has allowed buyers that have been sitting on the fence to finally afford to buy once again. After being priced out of the market with rampant appreciation earlier this decade, affordability is finally improving and inviting buyers that have been waiting a long time to finally purchase. Properties priced below $500,000 account for 47% of the entire active inventory and 56% of demand. Last year, this same range accounted for only 26% of the active inventory and demand. Detached homes below $750,000 are actually experiencing a slight sellers market, below the five month mark. 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.
Where's the demand in the upper ranges? 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. 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.
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.
Please feel free to contact THE HOOPER GROUP with any questions or real estate needs at:
(949) 389-7853 or visit www.OCResidence.com.