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Market Time Report: Market Time Passes the One Year Mark
August 23, 2007
Good Afternoon!
The lack of liquidity in the financial market due to the past few weeks on Wall Street has put a giant lid on demand here in Orange County. Demand, the number of new escrows within the prior 30 days, dropped to 1,475 from 1,804 just two weeks ago. Demand had been plodding along the 1,800 home mark for the past few months until Wall Street began to worry that the slowdown in housing and the mounting losses within the financial markets would bleed into the national economy. After reaching a record high of 14,000, the Dow quickly dropped to below 13,000 in just a couple of weeks. The Federal Reserve stepped in and cut the discount rate (nothing to do with rates for consumers but it helped the banks) to ease everybody’s fears of a complete meltdown and even hinted at future cuts. Earlier this month, the Federal Reserve opted to leave rates alone, but they had no way of anticipating the weeks that followed. The herd mentality of Wall Street is alarming; the DOW shed 1,000 points, or $1 trillion, in response to financial losses estimated to be at around $38 billion. With investors pulling out of financial markets and unwilling to purchase “pools” of loans now, financing is much harder to come by for buyers without great credit and a lot more money down. Investors had relied on a rating system for these “pools” of loans, but they have since found that the current system is completely unreliable. Experts are now calling for a new rating system to strengthen the financial markets, but that may take a few months. In today’s marketplace, buyers should go with direct lenders that are able to fund and hold their loans until everything is sorted out. Many loan programs have all but evaporated. So, in the interim, demand in Orange County is taking a hit. With the significant drop in demand, the inventory moved off of its plateau and reached a new record for 2007, 17,881 homes, an increase of 270 homes in the last two weeks. That is 1,875 more homes than the height of 2006, achieved exactly one year ago. This is typically the time period, back to school, when more and more frustrated sellers throw in the towel and the inventory drops. It will be interesting to see if this cyclical phenomenon holds true given the current market conditions. The current inventory jumped from 9.76 months two weeks ago to 12.12 months today. That’s correct; we have reached the one year mark in inventory in Orange County.
Currently short sales and foreclosures in Orange County account for 6% of the active inventory. Of all the short sales and foreclosures currently on the market, 55% are below $500,000 and 92% are below $750,000. So, short sales have really impacted the condominium market and areas with lower average sales prices. For example, Santa Ana has a market time of 25.49 months, or more than two years.
The condominium market is still slower than the detached home market, but the disparity has begun to shrink with the recent change in demand. The condominium market’s market time has increased from 10.64 months two weeks ago to 12.66 months today. The market time for detached homes has increased from 9.26 months to 11.79 months today. 32.4% of the current active condominium inventory is vacant versus 24.4% of the current active detached home inventory. Overall 27.4% of the active inventory is vacant. Due to the sluggishness in demand, many of these homeowners will opt to lease out their homes in anticipation of a stronger future market.
Here’s the big question of the day: where do we go from here? With Wall Street stabilized due to Bernanke and the Federal Reserves emergency action last week, it looks as if they can now wait until their next meeting in mid-September to take any further steps to stabilize the financial markets. It appears now that they are poised to cut both the discount and short term rates at that meeting. Rates over the past week have already started to move in the downward direction in anticipation of such a move. Current demand is 37% less than last year and 60% less than two years ago. While the Department of Treasury, the Federal Reserve, congress, Wall Street, etc., seek to repair the financial marketplace, it looks as if demand will continue to be hampered until liquidity increases. Demand will most likely receive a boost after Bernanke and the Federal Reserve announce a drop in rates. Even though rates are already dropping in anticipation, the announcement will be a psychological boost to the housing market. It is back to school over the next couple of weeks, marking the beginning of the Autumn market. Now is the beginning of the season of sellers pulling their homes off the market. With demand dropping and nearly 18,000 homes on the market, most sellers will not be successful in selling their homes over the Autumn and Holiday markets; thus, to avoid the hassle and frustration, the sellers who really do not have to sell will just throw in the towel. The active inventory will drop over the coming months. The Holiday market, Halloween through the first couple of weeks of the New Year, will be marked be very low demand, typically the lowest levels of the year (we may be experiencing the lowest levels right now), and a further drop in the active inventory as more and more sellers throw in the towel.
How should a seller approach the market? Given the current pressure on pricing with the recent drop in demand, PRICE is the most important factor in achieving success in today’s market. There are 17,881 homes on the market and 1,475 new escrows within the prior month. Given current demand, 16,406 homeowners will NOT be successful over the course of the next month, or an 8% chance of achieving success. Sellers who are unwilling to price their homes aggressively in this market do not stand a chance. In our offices, I have heard many agents who are surprised at their sellers who are reluctant to listen to the market facts, most recent sales and escrows, and price according to their own needs or desires. Unfortunately, buyers do not care about sellers needs when it comes to purchasing a home. The sellers who have been successful recently are those that have stepped out of the box and are willing to price their home to sell. Pricing a home correctly upon entering the market is extremely important as well. Homes that have been on the market for a long period of time end up reducing a number of times and chase the market down in price. Buyers ask why these homes have been on the market for so long and they essentially become stigmatized. It goes without saying that a home must be in excellent condition too. With so much competition, homes that look great and are priced well achieve success. With low demand, though, sellers must also be patient. The right price and condition do not guarantee a quick sale. So, now is the time for a real gut check for sellers: if you are not priced right and do not have the stomach for the current market, it is time to pull your home off of the market.
How should a buyer approach the market? This is quickly turning into a GOLDEN OPPORTUNITY for buyers: no competition, plenty of choices, more and more motivated sellers, interest rates on the decline. The Autumn and Holiday markets tend to weed out the serious from the not so serious sellers. There are not as many sellers “testing” the market. As more and more sellers pull their homes off the market, the remaining inventory will be full of motivated sellers. As a buyer, this is the time to work with a direct lender. Many escrows have fallen apart because of the inability to fund loans. The challenge is primarily at the mortgage broker level and that most lenders have either suspended broker access to their products or sharply raised the interest rates offered to mortgage brokers. Currently, the sales to list price ratio for successful sellers who have sold their homes is at 97%. That means that sellers who are motivated and price their homes accordingly are still getting pretty close to the asking price. So, bringing in an offer at 10% below the asking price will most likely result in nothing more than spinning everybody’s wheels. We could be rapidly approaching the absolute best time to sell, the bottom of the market that so many buyers are waiting for. It is time to get off of the fence and purchase. Take heart in the fact that historically Southern California and Orange County is a fantastic long term investment, not to mention an enviable place to live with a real lack of buildable raw land.
The following areas have inventories of less than ten months: Anaheim Hills, Brea, Canyon Areas, Cypress, Foothill Ranch, Huntington Beach, Laguna Woods, Mission Viejo, Rancho Santa Margarita and Seal Beach.
The following areas have inventories greater than fourteen months: Anaheim, Corona Del Mar, Dove Canyon, Garden Grove, Laguna Hills, La Habra, Lake Forest, Portola Hills, San Clemente, San Juan, Santa Ana, Talega, Tustin, Villa Park and all ranges above $2 million.
Robyn Seymour
reprinted with permission from RE/MAX
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