Covid 19 Orange County Market Update
Orange County Housing Report: The Showdown
April 6, 2020
There has been a “supply problem” for quite a while, and now
there is a “demand problem” at the same time.
Supply and Demand: A low supply is confronted with low demand.
There are a lot of people that assume the worst. Because of COVID-19 and the “stay at home” order across the United States, the economy has come to a complete halt and it has been thrown into an instant recession (better described as a “pandession”). As a result, the minds of so many immediately gravitate to the last recession, the Great Recession. That is when housing took a giant hit, and in Orange County values dropped 30%. Everyone was either impacted by the freefall of values or knew someone that was hurt by the unprecedented real estate slump. Since this is another recession, values will certainly drop, correct? Not so fast, it all boils down to supply and demand.
Here’s a quick history lesson as to what happened leading up to the Great Recession. In March of 2007, the subprime lending industry collapsed. Demand instantly dropped to levels that were much like today. Yet, there were over four times the number of homes on the market compared to today, reaching nearly 18,000 homes. With very low demand and a huge supply of homes, the housing market ground to a halt and home values plunged. The presence of so many risky subprime loans, pick-a-payment loans, and zero down payment loans in the system, the collapse in the credit and housing market was followed by a tsunami of distressed properties. The overly abundant supply and unstable credit foundation of the housing stock led to the tumble in values.
That’s just not where housing is today. Yes, there is now a “demand problem,” where buyers’ activity has substantially slowed to Great Recession levels. It’s unbelievable how demand shifted so quickly from humming on all cylinders one month ago to a snail’s pace today. Yet, the “demand problem” is starkly contrasted with the “supply problem,” there simply are not enough homes listed for sale. The showdown between both supply and demand are two countering forces that are moving housing to a Balanced Market, a market that does not favor buyers or sellers and values do not change much at all. Low demand pushes the market in the buyer’s favor; however, the low supply pushes it in the seller’s favor. As a result, a balance occurs.
Demand, the last 30-days of pending sales activity, dropped by 34% in the past two-weeks. It is currently at levels not seen since the start of the year, a snapshot of the lowest demand of the year, the holidays. There are still buyers in the
marketplace, especially below $1 million, just not nearly the pace that anybody is used to in the middle of the Spring Market. Demand was 54% higher last year. Just a month ago, demand was at levels last seen in 2017. In comparing today’s demand to 2017, it was 87% higher than today. COVID-19 has impacted demand significantly and has resulted in a “demand problem.”
Today’s housing market is impacted by a “supply problem” as well. Buyers can attest to not enough available homes to purchase. In fact, there are 39% fewer homes today compared to last year. Ordinarily the active inventory is growing during this time of the year. It increased by just 24 homes in the past two-weeks, up 0.6%. In the past five years, on average, the inventory has grown by 5%. With demand slumping, the inventory should rise, yet that is not the case. Instead, fewer homeowners are placing their homes on the market like they typically do during the spring, notoriously the busiest time of the year for housing. In the past 5 years, there were an average of 3,960 homes placed on the market in March. This year, there were only 2,822, a stunning 29% fewer, or 1,138 less. Currently there are also 818 homes on HOLD DO NOT SHOW. With not as many homes entering the fray coupled with sellers opting to place their homes on “hold,” the inventory remains flat and at anemic levels.
Weak demand has been pitted against a very low supply of homes to purchase. This is precisely why the market is moving towards a Balanced Market and not a Buyer’s Market. The good news for buyers is that they no longer need to rush to purchase. Multiple offers and buyers tripping over each other is no longer the norm. But, that does not mean that buyers are going to get “a deal.” This is NOT the Great Recession. That was a deep buyer’s market fueled by an oversupply of homes and a housing stock built on risky loans.
The showdown has begun. The “supply problem” has been matched with a “demand problem.” The combination of these two forces will result in housing slowing to a Balanced Market.
COVID-19 Update: Real estate is now an essential service.
On March 28th, the U.S. Department of Homeland Security issued an “Advisory Memorandum” that identified essential, critical infrastructure workers during the COVID-19 response, which included the real estate industry. The order does not mean that open houses and showing, as usual, are back. Thus, the California Association of REALTORS® has issued “Guidelines for Real Estate Best Practices During COVID-19.” Homes in escrow can now conduct professional inspections and on-site appraisals can take place. Virtual tours and professional pictures are strongly recommended and encouraged. Showing properties by appointment only is advised. The bottom line: while real estate is now an essential service, everyone needs to be mindful of social distancing and taking all of the necessary precautions in keeping everybody safe and stopping the spread of the virus.
Active Inventory: The current active inventory increased by 24 homes in the past two-weeks.
The active listing inventory increased by 24 homes in the past two-weeks, up 0.6%, and now sits at 4,183. The number of homeowners entering the fray has dropped considerably due to COVID-19 and a large number of homes have been placed on HOLD, limiting what is typically a time of the year where the inventory grows. This will continue until the “stay at home” order is lifted.
Last year at this time, there were 6,876 homes on the market, 2,693 more than today, a 64% difference. There were a lot more choices for buyers last year.
Demand: In the past two-weeks demand plunged by 34%.
Demand, the number of new pending sales over the prior month, decreased from 2,398 to 1,584, shedding 814 pending sales, down 34%. Many buyers have moved to sitting on the fence and waiting until the “stay at home” order is lifted. Buyers also want to be sure that the market does not depreciate like the Great Recession. Once the light at the end of the tunnel for the virus is known and buyers realize that housing is an industry that will lead the economic recovery, buyers will reemerge and so will demand. Expect current demand to drop a bit more from here, but will then remain flat until seeing that light.
Last year, there were 861 more pending sales compared to today, 54% more. The trend of stronger demand compared to the prior year ended and a new trend emerged, less demand compared to the prior year.
In the past two-weeks the Expected Market Time increased from 52 to 79 days, a SLIGHT Seller’s Market (between 60 and 90 days), where sellers get to call more of the shots, but home values are not appreciating much at all. Expect the market to cool from here and move to a Balanced Market (between 90 and 120 days). Last year the Expected Market Time was at 84 days, similar to today.
Luxury End: The luxury market continued to rapidly cool.
In the past two-weeks, demand for homes above $1.25 million decreased by 153 pending sales, down 43%, and now totals 206, its lowest level since January 2019. The luxury home inventory decreased by 164 homes, down 10%, and now totals 1,472, its lowest level of the year. Many luxury homeowners will continue to opt to wait to list their homes until after the outbreak. With a substantial drop in demand, the overall Expected Market Time for homes priced above $1.25 million increased from 137 to 214 days in the past couple of weeks.
Year over year, luxury demand is down by 164 pending sales, or 44%, and the active luxury listing inventory is down by 738 homes, or 33%. The Expected Market Time last year was at 179 days, better than today.
For homes priced between $1.25 million and $1.5 million, in the past two-weeks, the Expected Market Time increased from 80 to 120 days. For homes priced between $1.5 million and $2 million, the Expected Market Time increased from 80 to 140 days. For homes priced between $2 million and $4 million, the Expected Market Time increased from 248 to 323 days. For homes priced above $4 million, the Expected Market Time increased from 377 to 903 days. At 903 days, a seller would be looking at placing their home into escrow around September 2022.
Orange County Housing Market Summary:
• The active listing inventory increased by 24 homes in the past two-weeks, up 0.6%, and now totals 4,183. Last year, there were 6,876 homes on the market, 2,693 more than today, a 64% difference.
• Demand, the number of pending sales over the prior month, decreased by 814 pending sales in the past two-weeks, down 34%, and now totals 1,584. In the past 5-years, demand has increased an average of 5%. The drop is due to the Coronavirus. Last year, there were 2,445 pending sales, 54% more than today.
• The Expected Market Time for all of Orange County increased from 52 days to 79, a slight Seller’s Market (from 60 to 90 days). The increase is due to the Coronavirus. It was at 84 days last year, similar to today.
• For homes priced below $750,000, the market is a hot Seller’s Market (less than 60 days) with an expected market time of 51 days. This range represents 36% of the active inventory and 56% of demand.
• For homes priced between $750,000 and $1 million, the expected market time is 61 days, a slight Seller’s Market. This range represents 18% of the active inventory and 24% of demand.
• For homes priced between $1 million to $1.25 million, the expected market time is 109 days, a Balanced Market (between 90 and 120 days).
• For luxury homes priced between $1.25 million and $1.5 million, in the past two weeks, the Expected Market Time increased from 80 to 120 days. For homes priced between $1.5 million and $2 million, the Expected Market Time increased from 80 to 140 days. For luxury homes priced between $2 million and $4 million, the Expected Market Time increased from 248 to 323 days. For luxury homes priced above $4 million, the Expected Market Time increased from 377 to 903 days.
• The luxury end, all homes above $1.25 million, accounts for 35% of the inventory and only 14% of demand.
• Distressed homes, both short sales and foreclosures combined, made up only 1% of all listings and 1% of demand. There are only 21 foreclosure s and 24 short sales available to purchase today in all of Orange County, 45 total distressed homes on the active market, down 1 from two-weeks ago. Last year there were 46 total distressed homes on the market, nearly the same as today.
• There were 2,044 closed residential resales in February, 31% more than February 2019’s 1,564 closed sales. February marked a 12% increase compared to January 2020. The sales to list price ratio was 99.9% for all of Orange County. Foreclosures accounted for just 0.6% of all closed sales, and short sales accounted for 0.7%. That means that 98.7% of all sales were good ol’ fashioned sellers with equity.
Have a great week.
Quantitative Economics and Decision Sciences
Copyright 2020- Steven Thomas, Reports On Housing – All Rights Reserved. This report may not be reproduced in whole or part without express written permission by author.