OC Housing Report: The Squeeze on Housing

Story/graphics courtesy of Steven Thomas Quantitative Economics Decision Sciences.

As rates rise, the price of a home that a buyer is able to afford drops
considerably, especially in the higher price ranges.

The Squeeze on Affordability: With interest rates expected to rise, today’s low rates provide buyers the opportunity to afford quite a bit more home.
The United States economy is finally revving its massive engine. Jobs are beating expectations; unemployment has fallen to near pre-recession levels; wages are rising at the fastest pace in years; and, inflation is on the rise. In addition, the new, Trump administration is planning to ramp up infrastructure spending, lower taxes, and focus on jobs, all heavily contributing to much higher inflation expectations. As a result, the Federal Reserve is expected to once again raise the Federal Funds rate this week, which has already had an impact on mortgage rates, rising to a 2017 height.

With all of this positive economic news, what does it mean for the future of interest rates? The historically low 3.5% mortgage rates are officially in the rearview mirror, a chapter in the history books of the housing recovery. Buyers should not wait around for those rates to return. Instead, cashing in on today’s mortgage rate, still historically low, is a wise strategy.

Unfortunately, everybody has become accustom to a low interest rate environment. For proper perspective, in 1990 the interest rate was at 10%. In 2000, it was at 8%. Moreover, just prior to the Great Recession, the interest rate was at 6.4%. No, today’s rates are not as low as last October, but they are still a bargain compared to where they have been over the past 50 years.

It is imperative that buyers understand that the longer they wait to purchase, the greater the risk that rates will rise. As they rise, affordability erodes. For example, if a buyer can afford a $2,500 monthly mortgage payment with 20% down, they could have purchased a $667,000 home last October with a 3.5% rate. Today, with conventional rates at 4.375%, the

purchase price drops to $600,000. As rates rise further, purchasing power continues to crumble. At 4.75%, the $2,500 payment buys a $575,000 home. At 5%, it drops to $558,000. And, at 5.25%, it becomes a $542,000 home, $125,000 less than five-months ago.

For jumbo loans, loans above $636,150, today’s rates are at 4.75%. They were at 4.375% just prior to last November’s presidential election. As a result, if a buyer can afford a mortgage payment of $4,500 per month, they are looking at a $1,034,000 home today compared to a $1,081,000 home back in October. Similarly, as rates rise to 5% and then 5.25%, the purchase price contiues to drop. At 5.25%, it becomes a $978,000 home, $103,000 less than five-months ago.

The current Orange County housing market is sizzling hot with very low inventory and demand through the roof. A lot of what is driving demand is the desire to jump on today’s historically low interest rates before they rise, grinding down a buyer’s purchasing power. Securing a low rate now allows buyers to get more house for their money.

As the economy continues to improve, mortgage rates will rise. For buyers interested in cashing in on today’s low rate environment, the window of opportunity is closing.

Active Inventory: Within the past couple of weeks, the active inventory increased by 2% homes.
Since January 1st, the active inventory has only grown by 500 homes. In the past couple of weeks, it grew by an additional 111 homes, or 2%, and now sits at 4,571. The inventory is not climbing as fast as prior years because current demand is extremely hot. Additionally, so far in 2017, 11% fewer homes have come on the market compared to last year at this time. Within the last month, the trend deepened with 15% fewer homes coming on the market compared to last year. Why aren’t homeowners placing their homes on the market like before? Could it be all of the recent rain? Now that the rain has stopped and the sun is shining, only time will tell. Most likely, more and more homeowners will start coming on the market as Orange County transitions into spring with longer, sunny days.

Last year at this time, there were 5,444 homes on the market, 19% more. Two years ago, there were 5,560 homes on the market, or 22% more.

Story/graphics courtesy of Steven Thomas Quantitative Economics Decision Sciences.

Demand: Demand dropped by 3% in the past two weeks.
Demand, the number of homes placed into escrow within the prior month, decreased by 75 pending sales in the past couple of weeks, or 3%, and now totals 2,575. The drop is attributed to the short month of February. Also, demand would be even stronger if more homes were added to the active inventory. There just are not enough choices to satiate today’s scorching hot demand.

With a slight drop in demand and an inventory that grew a bit, the expected market time increased from 50 to 53 days, still a rock solid seller’s market.

Last year at this time, there were 2,671 total pending sales, 95 more than today, or 4%, but February 2016 was a leap year with an extra day of activity.

Luxury End: The luxury inventory grew by 8% in the past couple of weeks.
Demand is up for Orange County’s luxury home market with 66 additional pending sales compared to last year at this time, 17% higher. The luxury inventory is up by 62 homes, 3% more. The overall expected market time for all homes priced above $1 million is 136 days compared to 155 days last year.

In the past two weeks, demand for homes above $1 million decreased slightly from 465 to 447 pending sales, a 3% drop. The luxury home inventory increased from 1,891 homes to 2,033, up 8% and its highest level since mid-November 2016. The expected market time increased in the past couple of weeks from 122 to 136 days.

For homes priced between $1 million to $1.5 million, the expected market time in the past couple of weeks increased from 76 days to 87 days. For homes priced between $1.5 million to $2 million, the expected market time increased from 129 to 133 days. And, for homes priced above $2 million, the expected market time increased from 227 days to 252 days. At 252 days, a seller would be looking at placing their home in escrow around mid-November.

Story/graphics courtesy of Steven Thomas Quantitative Economics Decision Sciences.

Orange County Housing Market Summary:

• The active listing inventory increased by 111 homes in the past couple of weeks, a 2% rise, and now totals 4,571. There are 11% fewer homes that have come on the market so far this year compared to 2016. Within the prior month, 15% fewer homes have come on the market compared to last year. The inventory should start to rise as the market transitions into the spring and will most likely peak in mid-August.
• There are 50% fewer homes on the market below $500,000 compared to last year at this time and demand is down by 16%. Fewer and fewer homes and condominiums can now be found priced below $500,000. This price range is slowly vanishing.
• Demand, the number of pending sales over the prior month, decreased by 3% in the past couple of weeks, dropping by 75 and now totals 2,576. Today’s demand is 4% lower than last year when it totaled 2,671. The average pending price is $823,575.
• The average list price for all of Orange County is $1.7 million, up from $1.6 million two weeks ago. This number is high due to the mix of homes in the luxury ranges that sit on the market and the recent influx of luxury listings.
• For homes priced below $750,000, the market is HOT with an expected market time of just 31 days. This range represents 37% of the active inventory and 64% of demand.
• For homes priced between $750,000 and $1 million, the expected market time is 55 days, a seller’s market (less than 60 days). This range represents 19% of the active inventory and 19% of demand.
• For luxury homes priced between $1 million to $1.5 million, the expected market time is at 87 days, increasing by 13 in the past couple of weeks. For homes priced between $1.5 million to $2 million, the expected market time increased from 129 to 133 days. For luxury homes priced above $2 million, the expected market time increased from 227 to 252 days.
• The luxury end, all homes above $1 million, accounts for 44% of the inventory and only 17% of demand.
• The expected market time for all homes in Orange County increased slightly in the past couple of weeks from 50 to 53, a solid seller’s market (less than 60 days).
• Distressed homes, both short sales and foreclosures combined, make up only 1.7% of all listings and 3.6% of demand. There are only 25 foreclosures and 52 short sales available to purchase today in all of Orange County, that’s 77 total distressed homes on the active market, 8 fewer than two weeks ago, a drop of 9% and its lowest level since the start of the Great Recession 10 years ago. Last year there were 144 total distressed sales, 87% more.
• There were 1,879 closed sales in February, a 1% drop from January, but more than the 1,847 closed sales posted in February 2016. The sales to list price ratio was 97.3% for all of Orange County. Foreclosures accounted for just 1.2% of all closed sales and short sales accounted for 1.9%. That means that 96.9% of all sales were good ol’ fashioned equity sellers.

Have a great week.

Roy Hernandez
TNG Real Estate Consultants
Royaltyagent@gmail.com
949-922-3947

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