As mortgage rates continue to rise, eventually the housing market will evolve from its current crazy pace to one that is much more tolerable.
The Coming Change: The sharp rise in mortgage rates from 2.65% during the first week of January to 3.09% today is just the beginning of rising rates.
The Los Angeles Lakers reached the playoffs 10 years in a row between 1995 and 2004. They hoisted the Larry O’Brien Championship Trophy three times between 2000 to 2002. The team was stacked and included Kobe Bryant, Shaquille O’Neal, Derek Fisher, and Rick Fox. What happened in 2005? Shaquille O’Neal was traded to the Miami Heat and Derek Fisher signed as a free agent with the Golden State Warriors. The Lakers won only 34 games and missed the playoffs for the first time in 11 years. In sports, phenomenal teams do not last forever.
Housing is in the midst of its own playoff run and has been a Hot Seller’s Market since June of last year, 9-months straight. It is the longest since the 16-month streak that ran from March 2012 through July 2013. What happened in the summer of 2013 to end the run? The market decelerated because of higher mortgage rates.
In 2013, there was very little supply and low mortgage rates were juicing demand. Doesn’t that sound familiar? A low supply and a truck load of demand? The difference between 2013 and 2021 is that the supply of available homes to purchase today is even lower and demand is a bit higher due to even lower mortgage rates.
The Orange County active inventory in 2013 had reached its lowest level since tracking began in 2004, starting the year with 3,161 homes. It remained at that low level until April when it finally began to rise. Mortgage rates were at 3.34% in January 2013 and had increased to 3.63% in March. In June, rates increased to 3.9%, and they reached 4.37% in July. The active inventory increased from 3,208 homes at the end of March to 5,522 to start August, a 72% rise. Typically, the inventory peaks between mid-July and the end of August. The 2013 peak did not occur until October at 6,350 homes, a 98% rise from the low levels of March.
The late peak was due to mortgage rates reaching 4.5% at the end of August, which took a bite out of demand. Many homeowners also placed their homes on the market over the summer expecting the market to behave like it had earlier in the year with multiple offers, bidding wars, record sale prices, and sellers who got away with stretching their asking prices. Instead, they sat and lingered on the market with no success. The market had shifted. The shift could be felt in the marketplace during the summer of 2013 as mortgage rates had climbed more than 1% from the start of the year. Rising interest rates impacted home affordability and demand softened, which enabled the inventory to finally rise.
The Expected Market Time (time between pounding in the FOR-SALE sign and opening escrow) in 2013 started the year at 47 days, a Hot Seller’s Market (below 60-days) and had been hot since March 2012. It dropped to 33 days in March and then slowly rose from there. It reached 42 days in June, still hot, but not as crazy. In September it reached 80 days, a Slight Seller’s Market (between 60 and 90 days), where it remained for the rest of the year. A Slight Seller’s Market is one where sellers still get to call more of the shots during the negotiating process, but values are not rising much at all, and there are not as many multiple offer situations.
Housing started this year with the lowest level of homes since tracking, 2,633 homes, 17% fewer than 2013. Mortgage rates reached a record low during the first week of January at 2.65%. Since then, the inventory has shed an additional 11%, dropping to 2,349. The Expected Market Time dropped from 42 days to start the year, a Hot Seller’s Market, to 23 days today. At 23 days, Orange County housing is nothing short of nuts.
Yet, behind the scenes, according to Freddie Mac’s Primary Mortgage Market Survey®, mortgage rates have risen to 3.09%. They are poised to continue to rise as inflation fears emerge with a rapidly improving economy forecasted for the remainder of the year. There is a close correlation between 10-year U.S. treasuries and 30-year mortgage rates. When the 10-year rises, so do mortgage rates. They typically rise and fall together. The 10-year had dipped below 1% for the first time ever last year, solely due to the pandemic. As a result, mortgage rates dipped below 3% for the first time ever. With multiple vaccines circulating across the country, and even more to come to market, there is finally light at the end of the COVID-19 tunnel. The recent relief bill, excellent vaccine news, an improving jobs picture, and better U.S. economic charts will all feed into a rising 10-year treasury and, ultimately, 30-year mortgage rates.
Now experts are expecting a robust second half of 2021, just a few months away, the start of the next “Roaring 20’s.” Mortgage rates are projected now to increase anywhere between 3.5% to 4%, depending on the size of the economic boom. That is precisely where they were bouncing around prior to the pandemic, a much more normal range. These higher rates will be the catalyst to the market shift and the market will decelerate.
AN IMPORTANT NOTE: It will still be a Hot Seller’s Market. This is NOT a shift to a Buyer’s Market. This a shift from a housing market that is currently nuts, appreciating at about 1% per month, to a regular Hot Seller’s Market with normal, 4% to 5% appreciation per year. Sellers who overprice will sit and languish on the market.
Active Listings: The current active inventory dropped another 1% in the past couple of weeks.
The active listing inventory in Orange County continues to reach new lows. In the past two weeks, the inventory shed another 17 homes, down 1%, and now sits at 2,349. It is the lowest level since tracking began in 2004. With the official start of the Spring Market, more homeowners will finally enter the fray. This will become more noticeable in April and May as the number of available homes to purchase starts to distinctly rise. It should pick up steam during the summer coupled with rising mortgage rates.
There are fewer homeowners coming on the market compared to the 5-year average. During February, there were 209 fewer new FOR-SALE signs in Orange County, 6% less. This trend continued from January when there were 92 fewer homes, or 3% less. The new trend is due to the lack of available replacement homes that have many homeowners spooked about selling. They are fearful that there will be “nothing to buy,” limiting the number willing to participate in a market with such an anemic level of available homes to purchase. With projected rising rates to come, it would be wise for homeowners to take advantage of today’s hot market and cash in on current rates. There are great strategies for sellers to sell today and buy time to find a replacement property. Enlisting the help of a professional REALTOR® is the best bet in navigating today’s insanely hot market.
Last year in mid-March there were 4,159 homes on the market, 1,810 additional homes, or 77% more. There were a lot more choices for buyers compared to today.
Demand: Demand is at its hottest mid-March level since 2012.
Demand, a snapshot of the number of new pending sales over the prior month, climbed from 2,958 to 3,110 in the past couple of weeks, adding 152 pending sales, up 5%. This is the strongest mid-March level since 2012. Spring has arrived and so has the hottest time of the year for local housing demand. Expect demand to increase from here until peaking in mid-May. The increase in buyer demand is coupled with an increase in the number of homeowners coming on the market. More homeowners come on in May than any other time of the year. The increase in demand is offset by the increase in supply, so the overall market does not get hotter. Market time hits its lowest level between March and April and then rises for the remainder of the year.
Last year, demand was at 2,398, the start of the pandemic, that is 712 fewer pending sales compared to today, or 23% less. Comparing year over year housing data will be obscure for the remainder of the year. It is better to compare the levels to prior year. The prior 5-year average, from 2015 through 2019, was at 2,565 pending sales, 545 fewer pending sales, or 18% less.
In the past two-weeks the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) dropped from 24 to 23 days, its lowest level since tracking began in 2004, and is a very Hot Seller’s Market (less than 60 days) where there are a ton of showings, sellers get to call the shots during the negotiating process, multiple offers are the norm, and home values are rising fast. Last year the Expected Market Time was at 52 days, slower than today.
Luxury End: The luxury market did not change much in the past couple of weeks.
In the past two weeks the luxury inventory of homes priced above $1.5 million increased by 18 homes, up 2%, and now sits at 898. At the same time, luxury demand shed 3 pending sales, down 1%, and now sits at 477. Two weeks ago, it was at its strongest level since tracking began in 2004. With the inventory rising and demand dropping slightly, the overall Expected Market Time for luxury homes priced above $1.5 million increased from 55 to 56 days in the past couple of weeks. Luxury remains hot and it will continue to be hot through the Spring and Summer Markets.
Expect the luxury market to continue to improve over the next couple of months, peaking from mid-April to mid-May during the Spring Market.
Year over year, luxury demand is up by 243 pending sales, or 104%, and the active luxury listing inventory is down by 405 homes, or 31%. The Expected Market Time last year was at 167 days, substantially slower than today.
For homes priced between $1.5 million and $2 million, the Expected Market Time remained unchanged at 31 days. For homes priced between $2 million and $4 million, the Expected Market Time increased from 55 to 58 days. For homes priced above $4 million, the Expected Market Time decreased from 117 to 116 days. At 116 days, a seller would be looking at placing their home into escrow around July 2021.
Orange County Housing Summary
• The active listing inventory decreased by 17 homes in the past two-weeks, down 1%, and now totals 2,349, its lowest level since tracking began in 2004. In February, there were 6% fewer homes that came on the market compared to the prior 5-year average, 209 less. Last year, there were 4,159 homes on the market, 1,810 additional homes, or 77% more.
• Demand, the number of pending sales over the prior month, increased by 152 pending sales in the past two-weeks, up 5%, and now totals 3,110, its strongest mid-March level since 2012. The ultra-low mortgage rate environment is continuing to fuel today’s exceptional demand. Last year, there were 2,398 pending sales, 23% fewer than today. Keep in mind, it was the start of the pandemic too, which negatively affected demand.
• The Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, decreased from 24 days to 23, an extremely Hot Seller’s Market (less than 60 days) and the strongest reading since tracking began in 2004. It was at 52 days last year, slower than today.
• For homes priced below $750,000, the market is a Hot Seller’s Market (less than 60 days) with an Expected Market Time of 17 days. This range represents 30% of the active inventory and 41% of demand.
• For homes priced between $750,000 and $1 million, the Expected Market Time is 14 days, a Hot Seller’s Market. This range represents 16% of the active inventory and 26% of demand.
• For homes priced between $1 million to $1.25 million, the Expected Market Time is 19 days, a Hot Seller’s Market.
• For homes priced between $1.25 million to $1.5 million, the Expected Market Time is 21 days, a Hot Seller’s Market.
• For homes priced between $1.5 million and $2 million, the Expected Market Time remained unchanged at 31 days. For homes priced between $2 million and $4 million, the Expected Market Time increased from 55 to 58 days. For homes priced above $4 million, the Expected Market Time decreased from 117 to 116 days.
• The luxury end, all homes above $1.5 million, accounts for 38% of the inventory and only 15% of demand.
• Distressed homes, both short sales and foreclosures combined, made up only 0.5% of all listings and 0.2% of demand. There are only 8 foreclosures and 3 short sales available to purchase today in all of Orange County, 11 total distressed homes on the active market, up 4 from two-weeks ago. Last year there were 46 total distressed homes on the market, more than today.
• There were 2,283 closed residential resales in February, 12% more than January 2020’s 2,044 closed sales. January marked a 1% rise over January 2021. The sales to list price ratio was 98.8% for all of Orange County. Foreclosures accounted for just 0.09% of all closed sales, and short sales accounted for 0.17%. That means that 99.74% of all sales were good ol’ fashioned sellers with equity.