A Seller’s Market Will Prevail
According to the most recent Steven Thomas Orange County Housing Report (05.16.22), while the market is slowing, it is gradually evolving from its out of control, insane pace, to a normal seller’s market where pricing will be fundamental in finding success.
Economists are used to the constant chatter about recessions, bubbles, and plunging home prices. The current economic environment has amplified the noise: surging interest rates, highest inflation since 1981, and a volatile stock market. This will definitely have an impact on the economy and housing, yet it will not be to the extent of the fear-mongering masses who immediately jump to the worst possible outcome. The sky is NOT falling when it comes to housing.
Most people remember the burn of the Great Recession. It either happened to them specifically, a family member, or a friend. There was an unstoppable wave of foreclosures and short sales. Home prices plummeted, erasing years of incredible gains. Unemployment jumped and took over six years to recover. The Great Recession was the largest economic downturn since the Great Depression, and it has left deep scars on society at large. Flash forward to today and home prices continue to soar, interest rates remain elevated above 5%, housing is just starting to slow, and many are calling for an imminent recession.
Only two of the last six recessions negatively impacted housing values here in Southern California, and both were caused by the housing industry. The savings and loan crisis of the 1980’s and early 1990’s led to a recession and an erosion in homes values that started in August 1990. One of the main reasons for the recession: unsound real estate lending practices. The Great Recession began in 2007 after the March subprime meltdown. Easy credit, pick-a-payment plan, subprime lending, zero-down loans, easy qualifying, adjustable teaser rates, and fraudulent lending all led to the largest downturn since the depression.
When pundits start talking about a potential recession, everyone’s collective brains immediately recall the Great Recession and expect the economy and housing to behave just like it did in 2007. They forget about the other recessions where housing values continued to rise. Today’s housing has an extremely strong foundation with years of tight lending qualifications, large down payments, fixed rate mortgages, plenty of nested equity, and limited cash-out refinances.
In housing, during a slowdown, demand falls, the active inventory rises, and it takes longer to sell a home. During the Great Recession there was a glut of homes available to purchase and it was matched up with muted demand. Consequently, home values plunged. In Southern California there were nearly 120,000 homes available in 2007 compared to the 19,000 homes available today, over six times more. Today’s missing ingredient that would lead to falling home values is supply. The number of homes on the market today is far below averages prior the start of the pandemic when values were still rising, but at a much more methodical pace.
The Orange County supply is at 2,452, a sharp rise from the 994 homes on January 1st, but still far below the 3-year average prior to COVID (2017 to 2019) for this time of year of 6,255. That is 155% more than today, more than double. Even with a 348-home climb, or 17% rise, in the past couple of weeks, it is still off by 3,803 homes. That’s a lot to make up just to get back to more normal levels. Keep in mind that the inventory levels since 2012 have been remarkably muted compared to the Great Recession and it has become even more pronounced each year.
With swiftly rising mortgage rates so far this year, demand, the prior 30-days of pending sales activity, began to slide after reaching an early peak on March 31st, when it normally rises. After initially dropping slightly, demand has stabilized and rose in the past couple of weeks by 25 pending sales. It now sits at 2,179, which is still 21% lower than the 3-year average prior the COVID, and 30% lower than last year at this time. But it is not going to plunge from here. The housing market has already digested 5% plus rates and there are still plenty of buyers looking to purchase at these higher rates. The recent rise is indicating that demand has indeed become more stable and has found its footing.
Demand is muted compared to its elevated levels of the last couple of years, and lower than the normal levels prior to the pandemic, yet it is matched up against an abnormal muted supply of homes available today. This has resulted in the Orange County housing market remaining at an insanely, Hot Seller’s Market level. The Expected Market Time, the time it would take between hammering in the FOR-SALE sign to opening escrow, has risen from 20 days on March 31st to 34 days today, a two-week increase. However, at 34-days, the housing market is still at an insanely hot level. Anything below 60-days is considered a Hot Seller’s Market. From 60 to 90, it is considered a Slight Seller’s Market. The market is balanced between 90 and 120 days. It does not become a Slight Buyer’s Market until the Expected Market Time eclipses 120 days. And values do not fall swiftly until it is a Deep Buyer’s Market above 150 days. Today’s 37-day mark is nowhere close to a Balanced or Slight Buyers Market.
Steven Thomas Orange County Housing Report (05.16.22)
As the inventory rises and demand remains stable, the Expected Market Time will continue to slowly rise. It will remain a Seller’s Market this year, but it will take longer for sellers to find success, especially as the year progresses. Sellers will no longer get away with overpricing their homes. To find success, sellers will have to carefully arrive at their asking prices, taking into consideration the most recent comparable pending and closed sales.
Bottom line: The sky is not falling. Instead, housing is in the midst of transitioning from an insane, unhealthy velocity to a much more normal, methodical, “steady as she goes” pace.
Steven Thomas Orange County Housing Report (05.16.22)
If you’re interested in buying or selling your home, or have questions about the market, reach out to one of our agents today:
