OC Housing Going UP!

With the current market forces, Orange County housing appreciation is inevitable. Housing Appreciation: By the end of 2012, the story will change to housing appreciation. Nobody is talking about home price appreciation yet; but, given the current market dynamics, it is absolutely gonna happen. This is where the naysayers come out of the woodwork and point to all of the distressed sales and throw in the shadow inventory for good measure. But, it is time to push the emotion to the side and consider the facts, basic economic principles, and the irrefutable data. Every price range has its challenges, but the below $500,000 range is HOT. Homes priced at or near their market value are generating an avalanche of multiple offers. A home in this range moves pretty quickly. Upon writing an offer, buyers quickly find that they are one of many, offers on the home. Suddenly it becomes a battle of wills. In the end, the seller factors the highest price with the largest down payment. I know, you are thinking, “What about the appraisal?” In many instances, shrewd sellers and REALTORS® are leveraging the competition to drop the appraisal contingency and require the buyer to make up the difference between the appraisal price and the purchase price, IF there is an appraisal problem. This is precisely what a buyer is experiencing. Supply has dropped to levels not seen since June 2005. The expected market time for all of Orange County is 1.5 months, or six weeks. It is four weeks for homes priced below $500,000, 22 days for short sales, and 19 days for foreclosures. Remember, part of that time is burned negotiating the contracts between all of the offers generated. Now let’s strain our collective minds and think back to our economic classes. In looking at basic supply and demand, when there is too much supply and low demand, prices fall. That is precisely what happened at the beginning of the downturn. When the supply is low and demand is high, like today’s market, the pressure is on prices to rise. Throw in the increasing rents, historically rock-bottom, unbelievable interest rates, and affordability at a high not seen in years, and there is even more pressure on home values. It is going to take a while for appreciation to show, as appreciation lags behind increased activity. However, the April sales are about to be released this week. The number of closed sales will be a high not seen in years. But, I am worried that everybody will focus on the year over year decrease in the median sales price. The median sales price will most likely by higher in comparing it to May 2012, but it will most likely be lower than April 2011. This snapshot of sold data has absolutely no bearing on current housing activity and demand. It is simply the fact that the median is slow to move and appreciation lags. The increased activity and market shift just started in mid-February, only 90-days ago. Back then there were 1,300 more homes on the market, 29% more than today, for buyers to fight over. Buyers today know that the competition is fierce. To be successful, they have to carry a very sharp pencil and be willing to write incredibly attractive offers to convince the sellers to pick them over everybody else. This will result in closed sales slightly above the last comparable sale. As time goes on, these slight increases will all add up and translate to an increase in the fair market value of homes, a.k.a. appreciation. There will always be exceptions. Do you remember 2005? There was a lot of competition to purchase, very few homes on the market, and prices were appreciating. The Active Listing Inventory: The listing inventory dropped an additional 3% in the past two weeks. The lowest inventory that I have seen. It is still NUTS, and has not stopped dropping since June 2011 when there were 11,388 homes on the market. The inventory has almost been cut in half. It has to stop dropping soon, most experts are thinking that more homeowners will start to place their homes on the market upon reading reports of month to month appreciation and all of the increased activity. But a real concern is a return of UNREALISTIC sellers, pricing their homes at random overpriced levels at what they would like to get versus what the market will really bear. Homeowners just cannot get ahead of themselves. remember we are looking for “slight” appreciation. Just as buyers want to get 10% off of the asking price, sellers will want to get 10% more than the last comparable sale. The change is going to be a bit slower than that. There are 47% fewer homes on the market this year compared to last year. Last year at this time there were 11,188 homes, 5,305 more than today. There are 38% fewer than 2010. Every range is experiencing a tighter inventory compared to last year. Below $500k, the inventory is down 58%. From $500k to $1 million, it is down 45%. Above $1 million, it is down 21%. Demand: Demand dropped for the first time this year. Demand, the number of new pending sales over the prior month, followed a normal cyclical pattern for the first time this year, shedding 144 pending sales, or 4%, and now totals 3,848. There is still tremendous activity and the expected market time changed only slightly from 1.51 months to 1.53, virtually unnoticeable. Part of what is eating into demand is the sheer lack of inventory. Demand would be much stronger if more homes were placed on the market. REALTOR's reveals that they have many buyers that they simply have not been able to isolate a home. Over the past month, 14% fewer homes were placed onto the market compared to the same timeframe last year. I am often asked why so few homeowners are placing their homes on the market. Just as investors talk about buying low and selling high, which is quite logical, homeowners are going to take exception to selling at the bottom of the housing market. If they can wait for values to improve, then wait they must. Demand is 26% stronger than last year. From here,they say, expect demand to start to transition into the Summer market, not quite as hot as the Spring, but more along the levels of where it is now, still extremely hot compared to years past. Distressed Market: In just the past two weeks alone, the distressed inventory dropped an additional 10%. The distressed inventory is falling like a rock and it too has shown no signs of slowing, shedding 133 homes in the past two weeks and now totals 1,266, its lowest levels for several years. The distressed inventory, both short sales and foreclosures, has dropped a staggering 60% since the beginning of the year, per Steven Thomas. Last year at this time there were 3,798 short sales and foreclosures, three times more than today. It is important to iterate that absolutely nobody predicted a sharp drop in distressed homes. This was an unanticipated step and a crucial ingredient to the current recovery that is underway. The distressed inventory represents 22% of the entire active listing inventory and 47% of demand. There are only 287 foreclosures in all of Orange County, a drop of 17 in the past two weeks. The foreclosure inventory has not been this low since autumn 2007, the beginning of the distressed inventory. The expected market time is a very hot 19 days. Buyers looking for a foreclosure better bring a very sharp pencil. Short sales aren’t much different with a 22 day inventory. After shedding 116 homes in the past two weeks, the short sale inventory now totals 979, dropping below 1,000 for the first time since the autumn of 2007. It is ironic that everybody uses the term “short sales” to describe homes where the lender must approve taking less than the full outstanding loan amount. They are anything but “short.” The government has attempted to legislate response times and streamline the process; however, there are so many variables that slow down the ability to close: multiple loans, delinquent HOA dues, property tax liens, personal liens, and attorneys must all be dealt with during the lender approval process. Until these programs prove to make any impact on these sales, the new term will be “long sales.” I hope it sticks. Long sales properly describe the expectations that all involved should have on achieving a successful close. John Hacker CRU Real Estate Group