• Supply and Demand
• Northeast Orange County Appreciation
• Northeast Orange County Sales Distribution
• Northeast Orange County Supply of Homes
• What About Foreclosures
• The Truth About Short Sales
• The Orange County Market Time Report
• Noteworthy Notes from the Past Week
• California Job Market Is Getting Weaker

 

Northeast OC Home Supply and Demand for Existing Homes Under $700,000 (Aug 23, 2008) It's still a Tale of Two Markets.  Entry level market demand keeps getting hotter, while demand in the upper market continues to cool.  It's intresting to note that entry level demand is at its highest point since September, 2005. 

First time buyers and others who have been sitting on the sidelines for the last two years obviously see an opportunity to purchase a home.  Of course, property values have decreased substantially (See Northeast OC Appreciation, below), but interest rates are low and there is a good selection.

(8/23/08) If there's good news to report it is that the supply of homes for sale over $700K continues to fall and is at its lowest level since march, 2006.  The precipitous drop in supply last week while the demand remained constant has actually led to a decrease in the month's supply of homes.  What we're seeing are mixed messages, which is good.  It very well could mean that buyers have a better feeling about the market - instead of being scared stiff, they are beginning to have confidence in home investment.

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Are Prices Stabilizing?
The above chart details appreciation in Northeast Orange County from the beginning of 2003 through July 2008.  We see continued depression in the market, and we believe the picture shown above may be overstated.  It uses a normalized distribution of average values instead of median prices, which removes much of the distortion that caused by changes in distribution of sales.  In our case, upper-valued properties haven't been selling, which naturally depresses median pricing and non-normalized pricing models.  However, price distortion in the lower markets due to distressed sales does cause what we believe is a short-term distortion.

The huge bulge in prices between July 2004 and July 2008 is interesting.  Homes were gaining value at a much lower rate from 1999 through 2003, and skyrocketed upward the next three years.  The late 1990s marked the end of the previous housing decline, and home prices had been depressed from 1990 through 1997, so we see a recovery ion the late 90s that recovered the 25% loss we had in the early 90s.  If we extend a line (black line) from Jan 1999 to mid 2002 it intersects our appreciation line in early to mid-2008.  

Our expectations are that prices will stabilize, as distressed properties are flushed from the system, and our opinion is that this will occur early next year.  We would, however, issue a caveat that possible tax increases at both state and federal levels could negatively impact the capital market and the loan market.

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The chart above focuses on the entry level market for homes currently selling under $500,000.  With a reasonable down payment, qualified buyers can purchase a home using traditional conforming loans.  The pair of columns on the left compares the entry level properties for sale in 2007 and 2008 as a percentage of sales.  We see that entry level properties (<$500,000)comprised 30.5% of the sales in 2007, but in 2008 (to date) they comprise 52.0% of the market.  And, sales of homes over $500,000 fell from 69.5% to 47.1%.

Much of the change is due to property devaluation, as prices dropped approximately 20% in the last year, moving property values downward for a huge number of properties.  In an analysis of the market segments we tack weekly, <$700K and >$700K,  we found that the market has moved 300 - 400 properties from the >$700K market to the <$700K Northeast Orange County Market due to the decrease in home values.  This has skewed the supply and demand curves for these market segments and contributed to an increased supply of entry level homes.

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Northeast Orange County Supply of Homes (August 2008)

(8/17) Although the actual numbers are smaller than what we've become accustomed to during our recent upturn, the health of the market, determined by the consumption of the available supply in the entry level marketplace for first time buyers has been relatively strong.  The chart below details the supply of homes for two sections of our market: those priced above $700,000 and those bellow $700,000.

The supply of homes over $700,000 is relatively large and is being hampered by availability of loans for higher priced properties and also by a lack of organic buyers (move-up buyers).   We believe that the late-year downturn in home sales has begun in the >$700K market.

We see that the supply of homes in the lower market is very close to six months, which is traditionally thought to be a market in equilibrium.  Above six months is a buyers' market and below six month is a sellers' market.

Note the supply of homes has stalled in the upper market and possibly may be increasing - not the best scenario.  On the other hand, the <$700K market is really smoking and with a 5.4 month supply is a sellers' market - something we haven seen in three years.  We are seeing multiple offers on many properties in the <$700K range.

(8/23) A remarkable week - double barreled improvement in this metric.  The supply of homes has dropped significantly in both markets, and continues an overall improvement of 24% since July 4.  Interestingly, this parallels the downward movement in 2004 (an election year) and is contrary to the general upward movements in 2005, 2006 and 2007.  2004 started out as a strong sales year, but the supply of homes grew at a horrendous pace from March to August, beginning to fall later in the year. 

We will continue to watch and report this important statistic.

The supply of homes is calculated by dividing the number of homes for sale on a specific date by the number that closed escrow in the previous month. The calculation is a good indicator of how fast (or slow) homes are moving, and tells us how long it would take to sell all of the homes on the market, if they sell at the latest monthly sales pace.

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Credit Suisse has published a remarkable chart detailing the extent of the sub-prime and other adjustable loan problems :

Disregarding the Red "You Are Here" arrow and looking at "1" on the x axis as Jan 1, 2007, we can see that the sub-prime problem should begin declining in the 2nd half of 2008 (19-24 Months To Reset), disappearing in 2009. Builders have been their inventories and the federal stimulus package and new housing bill HR 3221 that will raise conforming limits to $625,000 is setting on the President's desk. We believe sales will increase and the market will stabilize in the second half of this year. However, downward pressure will continue to be applied to prices as long as the supply to demand ratio is high (>9 months) and lending guidelines are pushed higher.

(8/23) Our weekly data of county-wide foreclosures, bank owned properties, short sales and vacancies show decreases from the previous week in all categories.  This trend downward began several weeks ago and we don't know if it will continue or haven't analyzed why it is declining (increased absorption or decreasing supply)

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Everyone is talking about them, and lots of buyers are trying to make deals on them.  For sellers, it's a chance to honorably get out from underneath a home that they can no longer afford and possibly maintain their credit.  This article focuses on short sales from a buyer's perspective.

Short sales were recently assigned a unique field in our MLS system, providing a method that agents can easily identify them, and analysts, like me, can study them in real-time.  What the data show is what we've speculated about but not been able to quantify - that is: Short Sales are attractive but difficult birds to catch.

I looked at data from both Northeast Orange County and from the entire county.  The distributions were almost identical.  So, although this article focuses on Northeast Orange County, it is also applicable to the county. For the purposes of this study, the market is divided in four groups: Short Sales, Bank Owned Sales (REO), properties In the Foreclosure process and everything else - Traditional (Non-Bank owned) sales.

First a brief story - earlier this year Susie and I were looking for a property in Serrano Heights for out of town clients.  We had been searching for them for several weeks when a great buy popped up (this was before short sales were identified in the MLS).  We notified our clients, sent them information, photos, toured the property on their behalf and made an over-asking-price offer for them.  The sellers agent told us that the property was going into foreclosure, and the sellers were anxious to sell it.  We were hopeful.  The long and short of the story was that there were eighty offers on the property, and the bank didn't accept any of them.  It was a Short Sale and it went to foreclosure.

Fortunately, we soon found another property (not a short sale or REO property) that they loved at first sight, purchased and moved into.

More recently we've been working with a number of other buyers, and the short-sale allure of a low price is very attractive.  However, short sales don't go together easily.  Following are a series of charts that outline the situation:

What jumps out of the numbers is that the sales rate for Short Sales is very low. 

Short sale properties represent 23% of all the properties for sales but only 11% of the sales, while REO properties represent a mere 6% of the properties for sale and 18% of the sales.  Contrary to what the nightly news may lead us to believe, Traditional Sales represent a resounding majority of activity : 70% of all sales.

Perhaps the best way to look at the data is to examine at the supply to demand ratio, which represents the month's supply of homes.  Short sale properties have a 13 month supply of homes, REOs have a 2 month supply and traditional homes have a 6.5 month supply.  By this measure, REO properties are six times more purchase-able than Short Sales, while Traditional properties sell twice as quickly as Short Sales.

The problem isn't necessarily the desirability of the Short Sale properties.  In our opinion, it's more attributable to the banks' ability to to sell them.  Many times the only way to clear the title and affect a sale is to foreclose on the property, eliminating underlying loans and lenders from their interest in the property.  Many, if not most of the Short Sale properties are eventually foreclosed and move into the supply of REO homes where they sell quickly.

The above data show that the sales time for REO properties is short, and would-be buyers quickly find out if their offers have been accepted in a reasonably short period of time.  Short sale homes are another story.  Buyers can wait months to find out whether they've purchased the property or if it's going to foreclosure, in which case the outstanding offers are rejected.

Short sales can be a relatively good deal for the seller and an excellent opportunity for buyer, but in our opinion the odds for success for this type of sale are not in either's favor. 

Our recommendation is to work with a Realtor to thoroughly investigate any properties for sale in today's market, especially short sales.  A good Realtor should call other agents (competing properties, recent sales, neighboring properties in escrow), inspect tax rolls and loan records and track the local market daily.  Due diligence and current information in the hands and mind of a knowledgeable Realtor can can save days or weeks of time and frustration, as well as thousands and thousands of dollars.

Our advice:  (1) Buyers should look at the entire market.  There are excellent REO properties for sale, and many traditional sellers recognize and accept that prices have declined and are very negotiable.  Our buyers certainly look at short sale properties and have their fingers crossed but don't hold their breath.  In the meantime, they're looking at everything on the market that is reasonably priced.  (2) Buyers in this market should really work with an experienced and knowledgeable Realtor, who uses current information, determine a "best" offer price for any property of interest in this market.  There's too much money on the table to rely on old statistics or even recent sales in some cases.  (3) Recognize that lenders and banks have not lived in nor cared for the properties and in  most cases accept little or no responsibility for any defects the property may have.  Getting an inspection by a qualified property inspector is a  must. 

Definitions:
REO:  Property that is in possession of a lender or bank as the result of a foreclosure or forfeiture.
Short Sale: Sale of a house in which the proceeds fall short of what the owner still owes on the loan.  Lenders may agree to accept the proceeds of a short sale in lieu of the loan balance, if the borrower cannot make the loan payments.  The lender can minimize losses by forgoing the foreclosure process, and the borrower can pay off the loan for less than the outstanding loan amount.

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The year over year comparisons in Orange County housing demand are growing more unbelievable by the day.  Current demand is 103% greater than one year ago at this time.   Demand, the number of pending sales over the past month, increased by 51 homes in the past two weeks to 2,991.  In the past month, demand has increased by 258 pending sales.  In sharp contrast, one year ago demand was at 1,475 after dropping by 329 pending sales in just two weeks.  That marked the absolute beginning of the credit crunch.  We are still feeling the effects of the credit crunch today, especially in the upper ranges involving jumbo loans; however, the current severity pales in comparison to the initial six months of the crunch. From August 2007 through February 2008, demand trickled in as financial institutions, the Federal Reserve and all of Washington DC clamored to apply as many fixes as possible to jumpstart the financial system.  The crunch is currently not as severe, but it will continue as the strain of record defaults and foreclosures weighs down financial institutions around the world.  

Even though the crunch is affecting the market, demand is much healthier today compared to 2007 and 2006.  Current demand is not only 103% higher than 2007 levels, it is 27% higher than 2006.  It is amazing that this is occurring within an environment that is handcuffed by extremely tight regulations and new lending standards.  The disparity in Total Pending Sales, a statistic that I started tracking back in September of 2006 to show ALL pending activity and not just the past months activity (demand), is growing substantially.  The current total pending sales count grew by 101 homes in the past two weeks to 4,349 pending sales, compared to 2,113 pending sales last year and a drop of 348 in two weeks.  So, compared to last year, total pending sales are up 106%.  

Distressed properties, foreclosures and short sales, have become a major player in today’s market.  As distressed propertied continued to build after the beginning of the financial crunch, prices dropped significantly and restored affordability to the market not seen in several years.  First time buyers were finally able to reenter the marketplace and many fence sitters are finally jumping in as well.  We read and hear about the continued mass numbers of defaults and foreclosures, but the numbers of distressed listings actively on the market has reached a plateau and has even dropped in recent weeks.  This is due to the enormous appetite for affordable homes, primarily found below the $500,000 mark.  Distressed homes are now being placed into escrow as fast as they are coming on the market, allowing the distressed inventory to reach its current plateau.  There are 5,865 distressed homes on the market, a drop of 85 in the past two weeks.  42% of the active market is a distressed property, unchanged from two weeks ago.  This level is no different than the level reached at the end of May.  Prior to May, the distressed inventory was growing unabated since July of last year.  21% of the current distressed inventory is foreclosures, totaling 1,232 homes.  79% of the distressed inventory is short sales, totaling 4,663.  78% of all distressed properties are found below $500,000 and 93% are below $750,000.  The number of distressed properties in the upper ranges pales in comparison to the lower ranges.  For those looking to find a great “deal” by offering to purchase a property far below the asking price of a distressed home, good luck.  Your chances are much greater in winning the California lottery.  Many have the attitude of nothing ventured, nothing gained, but the statistics just are not on their side.  The sales to list price ratio, how close a home is sold compared to the asking price, is between 99% and 100% depending upon the price range.  Most distressed homes receive multiple offers and many sell for higher than the asking price.  Buyers need to keep in mind that prices have already dropped drastically; in essence,
they are already getting a “deal.”

So, what does the rest of the data look like?  The active listing inventory has shed 289 homes in the past two weeks and 687 over the past month and now totals 14,059, the lowest level since April 5, 2007.  While in the initial stages of the financial crunch, back in December, I felt that the inventory could blossom to 20,000 homes.  Instead, discretionary sellers who have equity in their homes decided, for the most part, to skip this market and not place their homes on the market and compete with the onslaught of distressed properties.  Also, with a significant drop in pricing and an increase in affordability, demand has also eaten into any potential increase in the inventory.  Last year at this time the inventory posted its second highest mark of the year of 17,881 homes, 3,822 additional homes, or 21% higher, compared to today.

Two years ago the inventory posted its highest mark for 2006 of 16,006, 1,947 additional homes, or 12% higher, compared to today.  The expected market time for Orange County dropped from 4.88 months two weeks ago to 4.70 months today.  The expected market time in 2007 had blossomed to double digits for the first time, 12.12 months, and would remain in double digits until February of this year.  Two years ago the expected market time was at 6.79 months.  It is easy to conclude that even with the giant negative spotlight on the financial markets and distressed properties, the Orange County housing market is at a much healthier place compared to the past couple of years and is on the road to an eventual recovery. 

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The really interesting part of the article is the use of a statistic, ratio of median single-family home resale prices to median family income.  The ratio between 1988 and 2003 was in the range of 2.6 to 3.2.  It rose to 4.0 in mid 2006 - when the bubble started to burst.  It's since dropped to 3.3, a good sign of approaching price stability.  Doti then goes on to analyze unoccupied house numbers, household creation and new construction.  The long and short is that the house consumption rate from new household creation alone will almost wipe out the current supply and new construction in the next twelve months.

My only comment would be that I see some homeowners who left the market returning, and I believe that even those who have lost their homes in the past two years will be returning.  Overall, the trends are good.

I highly recommend this article, and suggest that anyone who is thinking about buying a home in the near future read it.  If you are a subscriber, you can go to www.OCRegister.com and retrieve a printable copy.  If you are a subscriber to the paper and haven't read the on-line version, looked for an old article or for information, you're in for a real treat - it's one of the best on-line newspapers I've seen, and it's super-easy to set up an account.

Housing Investment Falls, From the OC Register
Jonathon Lansner, the longtime OC Register real estate expert and writer has crafted another fine article for those of us who are interested in the data underlying our market behavior.  Lansner methodically details how the housing malaise has negatively affected the national economy, as indicated by the national GDP.  At the peak, housing was contributing 6.2% to the GDP.  In the past quarter it had fallen to 3.5%.  OOPS!  That's a big part of what happened to the economy.  If you get a chance, Jonathan's article is well worth the read.  Look in the Marketplace section of the Sunday, August 3 paper.  "Housing investment falls $305 billion since '06".

Chapman Press Release: "California Job Market Is Getting Weaker", August 4, 2008
The renowned Chapman University Center for Economic Research distributed a press release this morning detailing the extent of employment malaise in California.  Using an index of 100 to describe a neutral market for employment, the current employment index is 93.9, down 5 index points from the previous quarter and well below the recent index highs in the 150s in 2004. 

The poor showing is attributed to a large degree to the drop in construction spending.  Bright economic spots included positive growth in real exports and real GDP.  However, decreased construction spending and declines in the S&P 500 more than offset the exports and GDP growth.

Big Gain in Pending Home Sales Index: Daily Real Estate News, August 7, 2008
Some improvement projected for existing home sales in months ahead . . .  Read the article

What's Fair Got to do With it?: Daily Real Estate News, August 6, 2008
It's not fair that taxpayers bail out lenders and foolish borrowers, but is it the right thing to do?   Read the article

Investor Report: Taxable Capital Gains:  Homes 101, August 8, 2008
Conversion of rental property to personal property, capital gains deductions are curtailed. Read the article

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