Because more homes are being offered for sale and demand is dropping, the Orange County housing market is becoming more balanced.
For six and one-half months, the Orange County Housing Market has favored sellers. With tremendous demand and very few homes on the market, buyers could not get a break. But that has changed. More homes are coming on the market, and demand is dropping. The old-fashioned balance scale has tipped from a hot seller’s market to a balanced market, one that does not favor either sellers or buyers.
Since 2012, everyone has been talking about not enough homes on the market. This lack of supply has fueled a frenzied real estate market, that is, until 2018. Now, the supply problem has evolved into a demand problem. Although the supply of homes has increased quite a bit this year, it remains below the long-term average of 8,000 homes. The real issue is not that there are way too many homes on the market, as in prior slowdowns; instead, it is that housing demand has dropped precipitously.
Demand, a snapshot of the last month of pending sales, has been down all year, especially from mid-April through August (see Figure 1). Surprisingly, that is the meat of the housing market, the Spring and Summer Markets. In taking a closer look at demand at the end of July, the numbers are staggering (see Figure 2). Demand was 18 percent higher last year. The last time demand was this low was in 2007, when the housing market completely fell apart. It is interesting to look at these differences in the context of the mortgage interest rate at the time. Today’s national average interest rate is 4.6 percent, the highest rate since 2011 (see Figure 3).
The housing run from 2012 through the first four months of 2018 has been fueled not only by an extremely low supply of homes on the market but also by ultra-low interest rates. Mortgage rates have been juicing the run-up in values. The only other time that housing slowed a bit during the run was at the end of 2013 through 2014. At that time, the culprit was higher interest rates. In December 2013, interest rates climbed to 4.5 percent, and they remained elevated through the Spring Market of 2014.
Home values have appreciated unabated, and the June median sales price reached a record of $739,000. When record high housing values are combined with interest rates that have climbed to heights not seen since 2011, it is no wonder that buyers are no longer as eager to purchase as they once were.
None of this means that the current market favors buyers. It is still a slight seller’s market. The Expected Market Time (the amount of time it would take to place a home on the market today and enter escrow down the road) at the end of July reached 88 days, knocking on the door of a balanced market. A seller’s market is hot when it is below 60 days. It is a slight seller’s market from 60 to 90 days. It is a balanced market from 90 to 120 days. Above 120 days, it is a buyer’s market.
Many mistakenly think that the market must favor either sellers or buyers. That is not true. A balanced market is one that does not favor either buyer or seller. It is like the metal scale when it is perfectly balanced. The supply is 13 percent higher year-over-year, and demand is down by 16 percent year-over-year. More supply and less demand are balancing the scale.
Warning to Buyers: Buyers are not in the driver’s seat, not even close. It is not a buyer’s market. The difference is that there are more choices now. The typical home is no longer flying off the market. Only extraordinary homes that are priced right will sell quickly. Buyers no longer need to trip over themselves to purchase. They are finally able to approach the market methodically and at a much more relaxed pace.
Warning to Sellers: Accurate pricing is essential to find success. Ignore the recent headlines about a record median sales price. That does not mean that homes are continuing to appreciate today. The June median is a reflection of homes that were placed into escrow in April and May. That was in the past, when the market was much hotter than it is today. Right now, there are a lot more homes on the market, meaning there is a lot more competition. Also, demand has dropped considerably, meaning that there are fewer showings and fewer potential offers. Overpriced, overzealous list prices result in wasted market time and do not generate offers. Pricing at or close to the Fair Market Value is the wisest formula for success.
Steven Thomas has a degree in quantitative economics and decision sciences from the University of California, San Diego, and more than twenty years of experience in real estate. His bimonthly Orange County Housing Report is available by subscription and provides housing market analysis that is easy to understand and useful in setting the expectations of both buyers and sellers. His website is www.ReportsOnHousing.com.