July 15, 2018
The 6-and-a-half year seller’s market is drastically slowing and feels sluggish.
A Changing Market: With more supply and less demand, the overall Orange County housing market has been losing steam.
Have you ever seen a windsock used by pilots to know the direction and speed of the wind? The housing market’s windsock has been blowing extremely hard in the seller’s favor since 2012. In that time, home values have risen about 80%. Over the past couple of month, the housing windsock has dramatically changed. It is not blowing as hard. It is more of a slight evening breeze.
The Orange County housing market has evolved this year. From February through April, there was not enough supply and plenty of demand. That was how the market had been behaving since 2012. Multiple offers within days was the norm. Buyers tripping over themselves to purchase was the norm. Sellers arbitrarily stretching their asking prices $25 thousand or more above the most recent comparable sale, and then getting away with it, was the norm. Not any longer.
What is going on? It all boils down to basic supply and demand. The supply of homes, the active listing inventory, has increased at the fastest pace since 2006. From the start of the year to today, the active inventory has blossomed by 77%. In 2006, it doubled. That was 12 years ago. There is a lot more seller competition today than there was at the start of the year.
Demand, a snapshot of the last 30-days of pending activity, has been a bit more sluggish all year. From April to today, it has been at levels not seen since 2007. With more supply and a lot less demand, the Expected Market Time, the amount of time it would take to list a home today and place it into escrow down the road, has climbed to 80-days, a slight seller’s market. Orange County housing is knocking on the door of a balanced market, 90-days, one that does not favor a seller or buyer.
In comparing the active inventory to last year, it is up in every single price range. Currently, there are 10% more homes on the market than last year. Keep in mind, there were fewer homes year over year for 20-months straight until May of this year. Since then, the difference has increased substantially. It is a new trend that is here to stay.
Similarly, year over year demand is down in nearly every single price range. Overall demand is down by 14% compared to last year at this time. There is a bit more demand in the $1 million to $1.25 million price range and the over $1.5 million luxury range, but both are more sluggish this year compared to last year because there are a lot more homes within those price ranges.
The biggest shift in the market can be found in the lower price ranges, homes priced below $1 million, which accounts for 57% of the active listing inventory and 78% of demand. That is where the Expected Market Time is 32% higher than last year at this time. Above $1 million, the expected market time is already a lot slower, typical for the higher price ranges. However, it is not typical for the meat of the market, homes priced below $1 million, to be this slow at this time of the year.
Why has demand drastically dropped? There are two factors at play: higher values and higher interest rates. Values have been increasing unabated for 6-and-a-half years at a pace that significantly outstrips the rise in incomes. That phenomenon cannot continue forever. Eventually, home values reach a point where they become unaffordable for the masses. As a result, buyer demand drops. That was already occurring on its own, but it was drastically aided by a rise in interest rates. Interest rates have risen from 4% at the start of the year to 4.625% today. Last year, interest rates dropped down to 3.75% by September. Moreover, many experts are forecasting interest rates to rise to 5% by year’s end.
Because of higher interest rates, today’s median sales price buyer is paying an additional 8%. Housing has appreciated 6% year over year as well. The payment for the May 2017 median sales price of $695,000 would have been $2,654 at 4% (that was the rate a year ago as well). So, the increase in the median sales price and the interest rate in the past year has resulted in a monthly payment that ballooned from $2,654 to $3,038, a 14% increase. That is an additional $384 per month, or $4,608 per year.
With the active inventory rising, demand falling, and interest rates rising, the market will continue to slow and feel even more sluggish. In order for sellers to be successful, properly pricing their homes is fundamental in order to find success. Sellers are not getting away with stretching and padding their asking prices. Buyers are finally getting a little relief. There are a lot more choices and the overall pace is a bit more relaxed.