The housing market can be frustrating for a buyer, so patience is essential.
Buyers Approach: The market is getting a little bit better for buyers, but it is still nuts.
Since mid-March the active inventory has increased and so has the expected market time. For homes price below $1 million, the inventory has doubled and the expected market time increased from a little over three weeks to six weeks. Both are extreme sellers markets, but it is slowing. It’s like speeding along at 65 miles per hour versus 55. Either way, you are still going fast.
Buyers feel the sense of urgency when a home is placed on the market at or near their fair market value. These homes generate multiple offers and a sea of buyers parade through the homes immediately. But, there has been a shift in the market and it lies in how most homes are initially overpriced. The inventory is increasing substantially and it is entirely on the backs of overzealous, irrational sellers reaching for the stars. Many are erroneously pricing their homes based upon other area listings that are overpriced.
Since homes have appreciated substantially in the past year, homes no longer look like a “fire sale.” Buyers are not willing to pay tens of thousands of dollars over the last comparable sale. Homes are still appreciating, just not at the rate that they were earlier this year. Keep in mind, values are still far from their peak.
In this overpricing environment, price reductions are the new norm. In some areas, 50% of the listing inventory has reduced their asking prices at least once. When homes are reduced at or close to their fair market values, they are achieving success.
Given the current environment, is it a good time to buy? Should a buyer who has written several offers with no success throw in the towel? It is absolutely an excellent time to buy and buyers should not throw in the towel out of frustration. The key to tackling this market it to be patient. The frustration is completely understandable; however, it is a very smart decision to pursue purchasing if a buyer plans on staying in their homes for several years to come.
Interest rates remain at historically low levels even after rising from 3.5% to nearly 4.5%. For perspective, in 1980 they were at 14%, in 1990 they were 10%, in 2000 they were 8%, and in 2007 they were 6.5%. Today’s interest rates are a gift from the Federal Reserve and are part of a long term strategy to reverse the course of housing and, ultimately, the overall economy. The rates have been working, but they will not last forever at their current level. Ben Bernanke and the Federal Reserve have already started talking about the end of this strategy; thus, rates have bumped up nearly 1%. It is not IF rates will be higher; it is WHEN rates will be higher. Nobody knows for sure when that will be, but the rise is inevitable after the stimulus is gone. Very few buyers really know the impact of rising rates and how much they influence affordability.
When the rates jump from 4.5% to 5.5%, the payment for 20% down on a $540,000 home (July’s median sales price in Orange County) increases by $264 per month, or $3,168 per year, or $15,840 in five years. At 6.5%, the payment is an extra $542 every single month, or $6,504 per year, or $32,520 in five years. 6.5% is still low. The trouble is that everybody is now accustomed to ridiculously low rates that are part of a stimulus package. Buyers should absolutely take advantage of today’s interest rates. They will be saving significantly every single month. One year after purchasing, a buyer will not care how much was paid for a home; instead, they will care about the check they have to write on a monthly basis. A savings of several hundred dollars each and every month is great for a family’s budget.
Yes, writing offer after offer can be very frustrating. But, with a long term objective and goal in mind of cashing in on today’s great home values along with today’s phenomenal interest rates, eventually success will be achieved.
Active Inventory: In the past two weeks, the active inventory jumped another 6%.
In the past two weeks, the active listing inventory has grown by 347 homes, the second largest gain this year, and now totals 5,869. Within the next couple of weeks, the inventory will cross the 6,000 home mark. From there, cyclically, the inventory begins to fall in the Autumn Market. Will this year follow the normal cycle? It may continue to grow through September before reality sets in. Only time will tell. There are 766 more homes on the active listing inventory today than one year ago. In all of Orange County, the inventory has increased by 84% since mid-March.
Demand: Demand increased by 5% in the past two weeks.
Typically for this time of year, demand remains flat; but, within the past two weeks, demand, the number of new pending sales over the prior month, has increased by 122 pending sales, and now totals 2,829. Last year demand was at 3,544 pending sales, 715 more than today. Remember, there were a lot more short sales last year embedded in those pending statistics, making the number appear artificially high. As we enter into the Autumn Market, we can expect demand to slowly fall. It will drop further during the Holiday Market as buyers turn their attention to eggnog and mistletoe.
Distressed Breakdown: The distressed inventory increased by 6% in the past two weeks.
The distressed inventory, short sales and foreclosures combined, has continued to increase since bottoming at 169 at the end of May. In the past two weeks, the distressed inventory increased by 15 homes and now sits at 246, 77 additional short sales and foreclosures compared to that May mark.
Only 4% of the active listing inventory and 11% of demand is distressed. Compare that to last year when it represented 14% of the inventory and 40% of demand. The current market is predominantly homeowners that have equity in their homes with a dash of distressed.
In the past two weeks, the foreclosure inventory increased by 2 homes and now totals 84. Even with the increase, only 1% of the inventory is a foreclosure. The expected market time for foreclosures is 41 days. The short sale inventory increased by 13 homes in the past two weeks, totaling 170, and has a sizzling expected market time of only 19 days. Short sales remain the hottest segment of the Orange County real estate market today.
