Orange County Housing Report: Pricing is Crucial
October 17, 2022 – by Scot Campbell – Source: Reports on Housing
Buyers now have the upper hand when negotiating in today’s market, which means sellers must painstakingly arrive at the asking price to be successful. To find success, sellers need to price their home according to its Fair Market Value based upon its location, condition, upgrades, amenities, age, décor, and overall appeal.
For nearly two years sellers got away with arbitrarily pricing a home where nearly everything sold instantly, with multiple offers, and closed sales prices way above their asking price. It was an auction-like atmosphere. There were throngs of buyers that viewed nearly everything that hit the market. Homes were listed FOR-SALE and, in some cases, buyers were only allowed to see a home during a three-hour window on a Saturday, and then all offers had to be submitted by the following Tuesday at 5 PM. After sifting through 10, 20, 30, or more offers, only one lucky buyer won. All the other buyers had to go back to the drawing board.
Pricing a home was so random, that many homeowners wanted even more than the price suggested by the real estate professional, leaving the professional scratching their head in disbelief that it would ever to sell. Often, after placing the home on the market, they were still able to procure multiple offers and ultimately sale above the asking price. The housing market was out of control and values surged higher. Not only did the record low mortgage rate accelerate demand, but the inventory also plunged throughout the pandemic. The mismatch between supply and demand paved the way to a historic rise in home values.
Those days are gone. The Federal Reserve has slammed on the brakes and done everything in their power to “reset” the housing market, one of the main economic drivers of the economy. As a result, mortgage rates have skyrocketed from 3.25% at the start of the year to 7.12% today, according to Mortgage News Daily, more than doubling, another historic rise. Affordability has taken an overwhelming hit and demand is now down by 43% compared to last year. With muted demand, the active inventory has ballooned and is up by 79% year-over-year. Consequently, the Expected Market Time, the amount of time from hammering in the FOR-SALE sign to opening escrow, has grown from a record low of 19-days in mid-March, an insane pace, to 77 days today. The Expected Market Time had eased from 72 days in July to 61 days to start September due to rates receding during the month of August, but that has all changed since.
The Federal Reserve made it perfectly clear coming out of the Jackson Hole, Wyoming economic conference that they were going to be extremely aggressive in raising the Federal Funds Short Term Rate further and that they were not going to change their stance through 2023. Getting inflation under control was now their main objective. Mortgage rates responded and they have climbed from 5.99% on August 31st to over 7%. The Expected Market Time has grown unabated from 61 days on September 1st to 77 days today, rising by more than two weeks and at its highest level since mid-May 2020, during the initial COVID lockdown.
From August of 2020 through May of this year, Orange County housing was moving at an insane pace. Seller got away with overpricing and the market required very little forethought when it came to price. Homes that backed to a busy street, or had an inferior location, still sold instantly. Homes that needed work or had deferred maintenance were snapped up nearly as fast as homes in great condition. There simply was nothing available to purchase and buyers jumped at nearly every home that came on the market.
Today, sellers no longer get away with stretching the asking price. Those days are gone. In fact, they must be extremely careful in arriving at a home’s Fair Market Value, or they will not find success. It is not as easy as pricing it right at the most recent comparable sale either. Rarely are two homes completely identical. There is a lot more that goes into the value of a home: location, condition, upgrades, amenities, age, décor, and overall appeal.
Today’s buyer wants a home to look like a model, turnkey. When it falls short, buyers will subtract from value. If a home needs carpet, the walls are scuffed and dirty, the kitchen is outdated, the yard needs work, the patio is cracked, the light fixtures are old, the bathrooms are dated, and there is plenty of deferred maintenance, buyers will subtract heavily from value. Many buyers will just skip these homes altogether and wait for a home to come along that is already done and ready for immediate occupancy.
ATTENTION SELLERS: To find success, sellers must price their homes according to its Fair Market Value. Pricing a home accurately is more important today than any other year since the end of the Great Recession. Negotiations are now leaning in favor of buyers, prices are slowly falling, and with affordability taking a drastic hit, buyers are unwilling to stretch, and they will do their due diligence in approaching any offer to purchase. Sellers also must be patient. The housing market is no longer instantaneous. The closer a home looks to a model, the faster it will sell. Pricing a home at the last comparable sale, yet it needs a lot of work, will simply not sell in today’s market. As a result, sellers have a choice. They can either invest in their home and update it prior to placing it on the market, or they can adjust the price to reflect the work that needs to be done. Buyers will also subtract for the hassle to do it themselves. With the market leaning in the buyers favor and values slowly falling, careful pricing is crucial.
Active Listings | The current active inventory remained almost unchanged in the past four weeks.
The active listing inventory increased by 10 homes, nearly unchanged, and now sits at 3,656. It has only risen by 18 homes total in the past month. On average, the 3-years prior to COVID (2017 to 2019), the inventory fell by 3% during these past four weeks and does not remain flat. It is not that there has been an increase in the number of sellers that has kept the inventory from falling; rather, it is the giant drop in demand since rates spiked recently. Due to incredibly muted demand, expect the inventory to remain flat through mid-November. From Thanksgiving through ringing in the New Year, anticipate the typical holiday seasonal plunge in the inventory. The fewest number of homes come on the market in the month of December and the second fewest come on in November. Match fewer homes entering the fray with a number of sellers throwing in the towel and pulling their homes off the market to enjoy the holidays, and the inventory will still drop considerably from where it sits today. Today’s inventory remains at an extremely muted level. While there are 79% more homes on the market compared to last year, there are far fewer homes than the inventory levels prior to COVID. The 3-year average inventory prior the pandemic is 6,306, or 72% more than today.
The new trend that developed this year is a sharp decrease in the number of homes coming on the market. For the month of September, there were 2,301 new FOR-SALE signs in Orange County, 728 fewer than the 3-year average prior to COVID (2017 to 2019), 24% less. So far in 2022, there have been 6,208 missing signs, down 19%. These missing signs counter the potential rise in the inventory.
Demand | The Demand continued to plunge, dropping an additional 11% in the past couple of weeks.
Demand, a snapshot of the number of new escrows over the prior month, decreased from 1,598 to 1,427 in the past couple of weeks, shedding 171 pending sales, or down 11%. It was largest drop of the year. In the past four weeks demand has dropped by 19%, or 329 pending sales. The market is still absorbing increasing mortgage rates as the pool of potential buyers continues to shrink. Affordability is a major issue and with rates surpassing 7%, the issue grows even more challenging. Last week the Consumer Price Index was again higher than market expectations, so do not expect the Federal Reserve to slow their resolve to continue their aggressive fight with inflation. Mortgage rates will remain at these elevated levels for the rest of the year and may rise slightly through the end of the year. Expect demand to remain incredibly muted and continue its decent through the end of the year and holiday season, typically the slowest time of the year for real estate.
Last year, demand was at 2,515, 76% more than today, or an extra 1,088. The 3-year average prior to COVID (2017 to 2019) was at 2,206 pending sales, 4255 more than today, or an extra 779.
With demand dropping faster than supply, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) increased from 68 to 77 days in the past couple of weeks, its highest level since mid-May 2020. Last year the Expected Market Time was at 24 days, substantially faster than today and home values were screaming higher. The 3-year average prior to COVID was at 87 days, a bit longer than today.
Luxury End | The luxury housing market improved slightly in the past couple of weeks.
In the past couple of weeks, the luxury inventory of homes priced above $2 million decreased from 797 to 788 homes, down 9 homes, or 1%. Luxury demand increased by 5 pending sales, up 3%, and now sits at 150. With the inventory dropping slightly and demand increasing a touch, the overall Expected Market Time for luxury homes priced above $2 million decreased from 165 to 158 days. With the instability of financial markets and Wall Street, and stubbornly high rates, expect the luxury market to slow through the end of the year.
Year over year, luxury demand is down by 79 pending sales or 34%, and the active luxury listing inventory is up by 259 homes or 44%. The Expected Market Time last year was at 69 days, much stronger than today.
For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 133 to 123 days. For homes priced between $4 million and $8 million, the Expected Market Time increased from 215 to 284 days. For homes priced above $8 million, the Expected Market Time decreased from 454 to 308 days. At 308 days, a seller would be looking at placing their home into escrow around August 2023.
Orange County Housing Summary:
The active listing inventory in the past couple of weeks increased by 10 homes, nearly unchanged, and now sits at 3,656. In September, there were 24% fewer homes that came on the market compared to the 3-year average prior to COVID (2017 to 2019), 728 less. Last year, there were 2,042 homes on the market, 1,614 fewer homes, or 44% less. The 3-year average prior to COVID (2017 to 2019) was 6,306, or 72% more.
Demand, the number of pending sales over the prior month, plunged by 171 pending sales in the past two weeks, down 11%, and now totals 1,427, its largest drop of the year. It is the lowest reading for mid-October since 2007. Last year, there were 2,515 pending sales, 76% more than today. The 3-year average prior to COVID (2017 to 2019) was 2,206, or 55% more.
With demand plunging, the Days of Supply, the number of days to sell all Orange County listings at the current buying pace, increased from 68 to 77 days in the past couple of weeks, its highest level since mid-May 2020. It was at 24 days last year, much stronger than today.
The luxury end, all homes above $2 million, accounts for 21% of the inventory and 10% of demand.
Distressed homes, both short sales and foreclosures combined, made up only 0.12% of all listings and 0.6% of demand. There is only 1 foreclosure and 2 short sales available to purchase today in all of Orange County, 3 total distressed home on the active market, down 3 from two weeks ago. Last year there were 11 total distressed homes on the market, similar to today.
There were 2,011 closed residential resales in September, 33% less than September 2021’s 2,981 closed sales. September marked a 7% decrease compared to August 2022. The sales to list price ratio was 98.2% for all of Orange County. Foreclosures accounted for 0.05% of all closed sales, and short sales accounted for 0.05%. That means that 99.9% of all sales were good ol’ fashioned sellers with equity.
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