Nope No Bubble
Many buyers are sitting on the sidelines in anticipation of a major housing downturn even though the facts illustrate it simply is not going to happen.
No Bubble: Housing data illustrates that there is not a housing bubble on the horizon.
It has happened to just about everybody. Driving down the road, unaware of your current speed, a look in the rearview mirror reveals there’s a police car with sirens blazing pulling you over. After receiving the ticket and driving away, for quite some time your driving habits change. You are more cautious, more aware of your surroundings, anticipating at any moment that, inevitably, you will be pulled over again.
Similarly, so many buyers and homeowners are mentally preparing for the next housing bubble to pop. Everybody knows somebody that was affected by the Great Recession when values dropped substantially, and countless homeowners lost their homes to foreclosures or short sales. With values surpassing record levels, isn’t housing a bubble again? Even though so many are anticipating another bubble, the answer is simple: NOPE.
The Great Recession was prompted by the housing market where anyone could purchase a home regardless of their true qualifications. Zero down payment loans, fudged loan documents, negative ARM’s, cash out refinancing, and subprime lending contributed to the run-up in values that filled the housing bubble that ultimately burst in 2007. As a result, the housing market collapsed, and home values plummeted.
The writing was on the wall prior to the collapse. Housing data illustrated market conditions that were lining up in favor of buyers. The inventory ballooned while demand crumbled. As a result, the Expected Market Time (the time between hammering in the FOR SALE sign to opening escrow) rose to ridiculous heights. The numbers were off a year prior to the subprime meltdown, which occurred in March 2007. In 2006, the Expected Market Time surpassed 150 days, a Deep Buyer’s Market, in June. It grew to 225 days by year’s end for ALL of Orange County. In 2007, it surpassed 150 days in March and by July, surpassed 290 days. By year’s end, it reached an Expected Market Time of 451 days.
Flash forward to 2019, and the Expected Market Time has remained between 60 and 90 days, a slight Seller’s Market, one where there is not much appreciation and sellers get to call more of the shots during negotiations. Today, smack dab in the middle of the Autumn Market, it is at 86 days. And, for the rest of the year, do not expect it to change much.
The big difference is supply and demand. Currently, the active listing inventory is at 6,616 homes. Back in October 2006, there were over 15,000 homes. In 2007, there were over 17,000 homes, nearly three times today’s supply. Current demand (the last 30 days of pending sales) is at 2,311. In 2006 and 2007 there were less than 2,000. With a supply of homes through the roof and weak demand, the Expected Market Time reached very high levels prior to the Great Recession and strongly indicated that housing values would slide massively.
It is also important to note that it is much more difficult to obtain financing today. Buyers must qualify for a loan and furnish paperwork that establishes their ability to make their monthly payments. There is no more “easy money.”
The housing market is not as hot today as it was from 2012 through 2017, but that does not mean that the housing is in a bubble. Demand is only slightly sluggish today and the active listing inventory is dropping fast. The storyline since 2012 is that there is a supply problem, not enough homes on the market. That story is true today and will continue in 2020. And, the low interest rate environment with mortgage rates below 4% has substantially helped home affordability and will fuel the housing market for quite some time.
The bottom line: today’s housing data illustrates a housing market that is on very strong footing. There is no bubble. The inventory is low, buyer demand is not weak, the Expected Market Time is low, and mortgage rates are at historically low levels.
Active Inventory: The current active inventory dropped by 3% in the past two-weeks.
In the past two-weeks, the active listing inventory dropped by 204 homes, down 3%, and now totals 6,412. That is typical for this time of the year, the inventory is dropping and will pick up speed in the coming weeks as housing pushes deeper into the Autumn Market. Sellers are extremely aware that both the Spring and Summer Markets are in the past. The number of showings is down, the number of deals is dropping, and the holidays are inching closer. As a result, fewer homeowners are opting to sell and many sellers are throwing in the towel.
Last year at this time, there were 7,292 homes on the market, 880 more than today, or a 14% difference. The inventory is MUCH different than last year when it continued to rise through Thanksgiving.
Demand: In the past two-weeks, demand dropped by 3%.
Demand, the number of new pending sales over the prior month, dropped by 60 pending sales in the past two-weeks, a 3% drop, and now sits at 2,251. Similar to the active inventory, demand will continue to drop for the remainder of the year and will pick up steam as housing inches its way to the holidays.
Last year, there were 277 fewer pending sales than today, 12% less.
In the past two-weeks the Expected Market Time dropped from 86 days to 85, a slight Seller’s Market (60 to 90 days), where home values do not change much, and sellers get to call more of the shots during the negotiating process. Last year, the Expected Market Time was at 111 days and climbing, much slower than today.
Luxury End: The luxury market continued to slow.
In the past two-weeks, demand for homes above $1.25 million decreased by 15 pending sales, a 5% drop, and now totals 289. The luxury home inventory decreased by 39 homes and now totals 2,218, down 2%. The overall Expected Market Time for homes priced above $1.25 million increased from 223 days to 230 over the past two-weeks, quite a bit sluggish compared to the lower ranges.
Year over year, luxury demand is up by 31 pending sales, or 12%, and the active luxury listing inventory is up by an additional 55 homes, or 3%. There may be more seller competition, but at demand is much stronger. The Expected Market Time last year was at 252 days, slower than today.
For homes priced between $1.25 million and $1.5 million, in the past two-weeks, the Expected Market Time decreased from 121 to 118 days. For homes priced between $1.5 million and $2 million, the Expected Market Time increased from 171 to 200 days. For homes priced between $2 million and $4 million, the Expected Market Time decreased from 332 to 316 days. For homes priced above $4 million, the Expected Market Time increased from 557 to 619 days. At 619 days, a seller would be looking at placing their home into escrow around July 2021.
Orange County Housing Market Summary:
- The active listing inventory decreased by 204 homes in the past two-weeks, down 3%, and now totals 6,412. Last year, there were 7,292 homes on the market, 880 more than today.
- Demand, the number of pending sales over the prior month, decreased by 60 pending sales in the past two-weeks, down 3%, and now totals 2,251. Last year, there were 1,974 pending sales, 12% fewer than today.
- The Expected Market Time for all of Orange County dropped from 86 days to 85, a slight Seller’s Market (between 60 to 90 days). It was at 111 days last year and climbing, a much slower market.
- For homes priced below $750,000, the market is a hot Seller’s Market (less than 60 days) with an expected market time of 56 days. This range represents 38% of the active inventory and 57% of demand.
- For homes priced between $750,000 and $1 million, the expected market time is 70 days, a slight Seller’s Market. This range represents 19% of the active inventory and 23% of demand.
- For homes priced between $1 million to $1.25 million, the expected market time is 109 days, a Balanced Market.
- For luxury homes priced between $1.25 million and $1.5 million, in the past two weeks, the Expected Market Time decreased from 121 to 118 days. For homes priced between $1.5 million and $2 million, the Expected Market Time increased from 171 to 200 days. For luxury homes priced between $2 million and $4 million, the Expected Market Time decreased from 332 to 316 days. For luxury homes priced above $4 million, the Expected Market Time increased from 557 to 619 days.
- The luxury end, all homes above $1.25 million, accounts for 34% of the inventory and only 12% of demand.
- Distressed homes, both short sales and foreclosures combined, made up only 0.98% of all listings and 1.1% of demand. There are only 23 foreclosures and 32 short sales available to purchase today in all of Orange County, 55 total distressed homes on the active market, down one in the past two-weeks. Last year there were 70 total distressed homes on the market, a bit more than today.
- There were 2,564 closed residential resales in September, 22% more than September 2018’s 2,090 closed sales. September marked a 10% drop compared to August 2019. The sales to list price ratio was 97.2% for all of Orange County. Foreclosures accounted for just 0.2% of all closed sales, and short sales accounted for 0.3%. That means that 99.5% of all sales were good ol’ fashioned sellers with equity.
Report courtesy of Steven Thomas Reports on Housing. Information deemed reliable but not guaranteed.