Orange County Housing Report: COVID-19 Cracks
Even though the housing market has been hot, trends have emerged that confirm that it is rapidly cooling.
What Cracks Are Appearing?: Trends have developed which demonstrate that the hot housing market is cooling due to the Corona virus.
The Corona virus has quickly evolved from bumping elbows and not holding hands at church to social distancing and a mandatory “stay at home” order from Governor Gavin Newsom for the entire state of California. Shopping malls have closed, schools have moved to electronic learning, restaurants now only allow take-out or delivery. Life as everybody knows it has been turned on its head.
Prior to the outbreak, Orange County housing was pumping on all cylinders. It was the hottest Spring Market since 2013. Multiple offers were the norm, home values were on the rise, and there simply were not enough homes on the market to satisfy the voracious appetite of buyers. The low mortgage rate environment with rates remaining in the 3’s was propelling housing upward.
Just as COVID-19 changed “business as usual” for everyone across the nation, trends have rapidly surfaced that highlight a cooling housing marketplace.
CRACK #1 – Demand did an about face and dropped by 7% in the past two-weeks. In the past five years, demand, the number of pending sales over the prior 30-days, averaged a 5% increase at this time of the year. The unconventional drop is due to pending sales falling out of escrow and fewer new pending sales. Demand is still 2% higher than last year, 48 additional pending sales, but the gap is closing. Two weeks ago, demand was 14% higher, 311 additional pending sales. Expect demand to continue to drop until the number of new Corona virus cases starts to diminish and the “stay at home” order has an end date.
CRACK #2 – The Expected Market Time increased by 8% in the past two-weeks, an unmistakable sign that housing is cooling. The Expected Market Time (the time between pounding in the FOR-SALE sign and opening escrow) increased from 48 to 52 days in just two-weeks. At 52-days, the market is technically a “hot” Seller’s Market, yet it is rapidly cooling. In the past five years, the Expected Market Time has dropped by an average of 4% in mid-March. It is officially spring, and the market normally gets hotter as more buyers start their home search. Expect the market to continue to cool the longer Californians are required to remain confined in their homes.
CRACK #3 – There are 528 homes that were placed on “Hold Do Not Show.” There are a number of sellers who are opting to wait for the crisis to end before placing their home back onto the open market. Some know that activity will diminish and are desirous of waiting until the conditions line back up in their favor. Others simply do not want strangers touring their homes while reports continue to detail the spread of the COVID-19 virus. With so many homes being placed on HOLD, the active inventory is not growing despite the drop in demand. This too is a trend that will continue to grow until an end to the spread is in sight.
Despite the emerging cracks in the housing market, housing is not going to plummet into the abyss and bring a wave of foreclosures and short sales similar to the Great Recession. That is an unfounded rumor not based on all the facts. Yes, housing is downshifting and will slow in the coming weeks. Yes, these trends will continue to evolve and deepen. The extent and weight of the slowdown all depends upon the duration of the Coronavirus outbreak and how long everybody must remain in their homes.
It is important to understand that the housing market has a very long way to go before it even tilts slightly in favor of buyers. Currently Orange County is still tilting heavily in favor of sellers. Housing must first evolve from a Seller’s Market, less than a 90-day Expected Market Time, to a Balanced Market, between 90 and 120-days. It is currently at 52 days. It is only a slight Buyer’s Market between 120 and 150-days. Home values start to drop in a “deep” Buyer’s Market, that is an Expected Market Time greater than 150-days. In 2018, with rising interest rates, housing took 8-months to go from a HOT Seller’s Market to a slight Buyer’s Market. It quickly reversed course at the start of 2019 as rates dropped.
The strength of the market depends upon supply and demand. Demand will drop, but so will the supply of homes. The active listing inventory will drop as many homeowners will wait to place their homes on the market until after the number of new cases of the Corona virus begins to diminish.
The government and lenders will initiate programs for borrowers who are unable to make their monthly mortgage payments. The foundation of housing is strong. Housing is not a house of cards about to collapse like it was prior to the Great Recession. Buyers have been purchasing with cash and large down payments. They have had to qualify for loans and prove that they could afford the monthly payment. There are no subprime or pick a payment plan loans. Homeowners have not been using their homes as ATM’s and pulling out massive amounts of equity like they did prior to the last recession. This is not a housing induced slowdown. This is an unexpected downturn and the government and banks are going to make sure that homeowners remain in their homes. The bottom line: there will not be a wave of distressed sales.
Active Inventory: The current active inventory decreased by 2 homes in the past two-weeks.
The active listing inventory decreased by 2 homes in the past two-weeks, nearly unchanged, and now sits at 4,159. The active listing inventory will drop from here and then remain at a low level until after the “stay at home” order has been lifted in California. Many sellers have opted to place their homes on “Hold Do Not Show” as well.
Last year, at this time, there were 6,532 homes on the market, 2,373 more than today, a 57% difference. There were a lot more choices for buyers last year.
Demand: In the past two-weeks demand dropped by 7%.
Demand, the number of new pending sales over the prior month, decreased from 2,583 to 2,398, shedding 185 pending sales, down 7%. The “stay at home” order has made it extremely difficult for buyers to see homes. Virtual tours and professional photos will go a long way in allowing buyers to view homes that they are interested in digitally. Demand will continue to drop and remain at muted levels until the COVID-19 outbreak subsides.
Last year, there were 48 fewer pending sales compared to today, 2% less. The trend of stronger demand compared to the prior year is about to end.
In the past two-weeks the Expected Market Time increased from 48 to 52 days, still a HOT Seller’s Market (less than 60 days), where home values are appreciating, and sellers get to call the shots. Expect the market to cool from here. Last year the Expected Market Time was at 83 days, much slower than today.
Luxury End: The luxury market cooled considerably in the past two-weeks.
In the past two-weeks, demand for homes above $1.25 million decreased by 57 pending sales, down 14%, and now totals 359, its lowest level since the end of January. The luxury home inventory decreased by 38 homes, down 2%, and now totals 1,636. Many luxury homeowners will opt to wait to list their homes until after the outbreak. With a substantial drop in demand, the overall Expected Market Time for homes priced above $1.25 million increased from 121 to 137 days in the past couple of weeks.
Year over year, luxury demand is up by 7 pending sales, or 2%, and the active luxury listing inventory is down by 454 homes, or 22%. The Expected Market Time last year was at 178 days, noticeably slower than today.
For homes priced between $1.25 million and $1.5 million, in the past two-weeks, the Expected Market Time increased from 71 to 80 days. For homes priced between $1.5 million and $2 million, the Expected Market Time remained unchanged at 80 days. For homes priced between $2 million and $4 million, the Expected Market Time increased from 175 to 248 days. For homes priced above $4 million, the Expected Market Time increased from 321 to 377 days. At 377 days, a seller would be looking at placing their home into escrow around March 2021.
Orange County Housing Market Summary:
Orange County Housing Report: Temperature’s Rising!
The Orange County housing market is officially a HOT Seller’s Market!
Getting Hot: The market is getting crazy hot below $1 million.
Mother Nature’s seasons do not matter. Sitting outside, watching one of the kid’s games from the sidelines can get really hot when there are no clouds in the sky. Wearing jeans is often a mistake that is made, a natural target for the sun’s incredible intensity while sitting in a folding chair. The darker the jean, the quicker the temperature rises.
With interest rates at lows not seen since October 2016, there are no clouds in the sky and housing is already really hot. The Spring Market has officially arrived in Orange County. Some price ranges are really feeling the intense heat of blistering buyer demand. Housing has not been this hot since April 2018, nearly two years ago.
Once again buyers are tripping over themselves to purchase. Homes that are priced well according to their condition, location, and upgrades, are fetching multiple offers within the first couple of days. The bidding war days are back. When a home generates 15 offers to purchase, there is only one winner, meaning 14 buyers need to go back to the drawing board. After a couple of failed attempts, many buyers sharpen their pencils and write extremely aggressive offers, willing to stretch the price a little bit, even if it means paying more than the most recent comparable sale. This market can be extremely frustrating for a buyer. It is all due to hot buyer demand fueled by low mortgage rates. Patience and a comprehensive strategy are a buyer’s bet in finding success.
The expected market time (the time between hammering in the FOR-SALE sign and opening escrow) for all of Orange County is now at 55 days. When the expected market time drops below 60 days, the market is considered a rock-solid seller’s market with steady price appreciation. Last year, Orange County never dipped below the 60-day threshold. It appears as if 2020 is going to be much hotter than the last couple of years.
There are many price ranges that have dipped below 60-days. For detached homes, it is everything below $1.5 million, 84% of current detached demand. For attached homes, it is everything between $250,000 to $1 million, 87% of attached demand. When the expected market time dips below 40 days, the market shifts to a sizzling hot seller’s market with rapid price appreciation. Everything between $500,000 and $1 million is SCORCHING for detached homes, 59% of demand, and all townhomes between $500,000 to $750,000, 39% of demand. These price ranges are experiencing the most intense buyer activity. It is like wearing black jeans on the sidelines of a kid’s game. More offers are generated, bidding wars are intense, and homes are flying off the shelves.
The market does not lean in the seller’s favor for detached homes priced above $1.5 million and condominiums priced above $1 million, luxury housing. They represent 30% of the inventory and only 9% of demand. The higher the price, the slower the market. Yet, the luxury market has improved considerably since the start of the year and the Expected Market Time has been consistently dropping.
Warning to Buyers: with an extremely low mortgage rate environment, the market is not going to change anytime soon and tilt in the buyer’s favor. The market is lined up in favor of sellers with tremendous demand and a very low supply of available homes to purchase. Do not sit on the fence and wait for the market to change. Values are on the rise. Many buyers talk about “timing the market.” That is an exercise in futility and will result in prospective buyers kicking themselves down the road and wishing that they had pulled the trigger sooner.
Warning to Sellers: do not stretch the asking price much at all. Overpriced, overzealous list prices result in wasted market time and do not generate offers. Pricing at or close to the Fair Market Value is the wisest formula for success, maximizing demand immediately upon coming on the market.
Active Inventory: The current active inventory actually dropped by 18 homes in the past two-weeks.
The active listing inventory decreased by 18 homes in the past two-weeks, nearly unchanged, and now sits at 4,005. The only reason the active inventory increases have not yet materialized much this year is due to the insane amount of buyer demand. Homes are coming off the market and placed into escrow as quickly as they are coming on. But, now that the Spring Market is officially here with the start of February and both the Super Bowl and the holiday season firmly in the rearview mirror, more homes will enter the fray and pop on the market. Yet, based upon current buyer demand, the inventory will not vividly rise.
Last year at this time, there were 6,100 homes on the market, 2,095 more than today, a 52% difference. There were a lot of choices for buyers last year.
Demand: In the past two-weeks demand exploded upward by 28%.
Demand, the number of new pending sales over the prior month, climbed from 1,702 to 2,173, an additional 471 pending sales, up 28%. It was the largest increase in two years. Demand is on the rise, which will continue until peaking in late April to mid-May. The market is rapidly getting hotter because demand has been surging while the inventory has remained flat.
Last year, there were 382 fewer pending sales than today, 18% less.
In the past two-weeks the Expected Market Time plummeted from 71 to 55 days, a HOT Seller’s Market (less than 60 days), where home values are appreciating, and sellers get to call the shots during the negotiating process. Last year the Expected Market Time was at 102 days, a much slower market than today.
Luxury End: Luxury demand continued to rapidly climb in the past two-weeks.
In the past two-weeks, demand for homes above $1.25 million increased by 86 pending sales, a 30% jump, and now totals 370. The luxury home inventory increased by only 25 homes and now totals 1,547, up 2%. With demand soaring and the inventory only rising slightly, the overall Expected Market Time for homes priced above $1.25 million plunged from 161 to 125 days in the past couple of weeks.
Year over year, luxury demand is up by 121 pending sales, or 49%, and the active luxury listing inventory is down by 315 homes, or 17%. The Expected Market Time last year was at 224 days, remarkably slower than today.
For homes priced between $1.25 million and $1.5 million, in the past two-weeks, the Expected Market Time decreased from 83 to 63 days. For homes priced between $1.5 million and $2 million, the Expected Market Time decreased from 144 to 117 days. For homes priced between $2 million and $4 million, the Expected Market Time decreased from 181 to 143 days. For homes priced above $4 million, the Expected Market Time decreased from 468 to 391 days. At 391 days, a seller would be looking at placing their home into escrow around March 2021.
Orange County Housing Market Summary: