Orange County 2015 Real Estate Outlook

2015

What does the New Year mean for Orange County Real Estate?

2014 started with an active inventory of 4,733 homes, the lowest point of the year. That was a much higher start compared to 2013’s extremely anemic, 3,161 homes. That was the year of multiple offers, purchase prices above their asking prices, and rapid appreciation, at least for the first half of the year. Low values and low interest rates fueled the robust housing market and buyers were willing to pay just about any price for a home. However, values increased to a point where buyers were no longer willing to pay thousands of dollars above the last sale. They were only willing to pay close to the Fair Market Value for a home. As a result, houses began to sit on the market as sellers were no longer getting away with pricing their homes thousands of dollars above the most recent comparable sale. The inventory reached a high of 6,350 homes in October of 2013.

Many unsuccessful sellers from 2013, along with a surge of new sellers, came onto the market anticipating that the first half of 2014 would be a lot like the first half of 2013. Consequently, they overpriced their homes expecting multiple offers and more robust price appreciation. They failed to realize that buyers were no longer tripping over themselves to purchase because values had already reached a point where affordability was starting to become an issue. Buyers continued to desire paying the Fair Market Value for a home. They would pour over the most recent comparable sales and did not want to pay much more.

From the start of the year through mid-August, the active inventory increased unabated, reaching a height of 8,084 homes, a 71% increase. The inventory increased in every price range and every city in Orange County. If a home was not priced right, it did not sell. It was as simple as that. 2014 became the year of the overpriced home. As a result, 10% of the active listing inventory reduced their asking price every week. The Multiple Listing Service (MLS) has a helpful red arrow pointing downward adjacent to the asking price if the price was reduced. In bringing up a list of homes in every corner of Orange County, nearly half of them had red arrows pointing down. Sellers did not get it. They did not listen to their real estate professional in terms of pricing, so, in order to be successful, they had to reduce the asking price, and often more than once.

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It was not until the kids went back to school when sellers started to figure out that the days of arbitrarily overpricing a home and still obtaining multiple offers, or even one offer, were in the rearview mirror. By then, they also came to the realization that the best times of the year, in terms of demand, were in the past, both the Spring and Summer Markets. During the Autumn and Holiday Markets, the active inventory shed 3,084 homes, or 38%. Sellers finally got it: they either reduced their asking price closer to their market valueor they threw in the towel and pulled their home off of the market.

 

Within the past two weeks, the inventory shed an additional 589 homes, an 11% drop, and now totals 5,000. Last year at this time there were 267 fewer homes.

 

DemandBuying an Orange County home was all about “I am not overpaying.”

As long as homes were priced close to their Fair Market Values, they sold quickly. Unfortunately, most sellers started off their efforts overpriced and sat on the market until they finally came to the realization that the market was all about proper pricing.  Buyers were willing to wait in order to isolate a home that was priced right. They were unwilling to overpay.

Demand, the number of new pending sales over the prior 30 days, peaked in April at 2,818 pending sales, 9% below the peak in 2013. Overall, demand in 2014 was off by 10% year over year. The market followed a normal housing cycle with the strongest demand during the Spring Market, followed by slightly less demand during the Summer Market, and finally much less demand during the Autumn and Holiday Markets. Demand would have been much higher during each of the seasons if sellers were much more realistic in their pricing, but that just was not the case in 2014.

Within the past two weeks, demand dropped by 266 pending sales, or 15%, and now sits at 1,478. In comparing year over year demand, it is only 1% lower than last year with 17 fewer pending sales.

Distressed Properties: Foreclosures and short sales played a very tiny role in the Orange County housing market.

As a result of so much appreciation in both 2012 and 2013, the number of homes that were underwater in Orange County dropped to a little more than 3% by the end of 2014. That paled in comparison to prior years, peaking several years ago at more than 25% of all mortgaged homes owing more than their homes were worth. As a result, fewer homeowners were forced to go the short sale route. In the last year alone, the number of short sales dropped by 66%. The number of foreclosures dropped by 55% as well.

Out of the 28,063 residential resales in 2014, only 1,544 were either a short sale or foreclosure, accounting for only 5.5% of the Orange County real estate market. That meant that 94.5% were good ol’ fashioned sellers with equity in their.

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homes, non-distressed. With so few distressed homes, the market was at its healthiest point in eight years.

The distressed inventory started the year at 271 total foreclosures and short sales, and ended the year at 295, a difference of only 24.

Distressed homes remain one of the hottest segments of the Orange County housing market with an expected market time of 54 days. Within the past two weeks, the distressed inventory decreased by 33 homes and now sits at 262, an 11% drop.

Expected Market Time: for most of 2014, the expected market time hovered around 90 days.

After starting the year with an expected market time of 95 days (the length of time it would take to sell a home based upon current supply and demand), it dropped to 65 days by mid-April. By July, the expected market time had increased back to 95 days and did not change much for the remainder of the year. As demand dropped, so did the inventory; thus, there was almost no change in the expected market time.

The expected market time for all of Orange County grew to 101 days in the past two weeks, the highest level since January 2012, three years ago. For homes priced below $1 million, the expected market time is 83 days. For homes over $1 million, the expected market time is 8.1 months. These levels are nearly the same as one year ago today.

The 2015 Forecast: the tug of war between overzealous sellers and buyers only willing to pay the perceived fair market value for a home will continue throughout 2015. 

The Federal Reserve has hinted at increasing the Federal Fund Rate sometime in 2015. Know that when this happens, mortgage rates will rise, which will cut into home affordability in Orange County. Here’s the forecast:

  • As more overzealous, overly optimistic homeowners enter the fray and overprice their homes, many of them returning, unsuccessful sellers from 2014, expect the inventory to rise to about 9,000, peaking by the end of August.
  • Demand will remain subdued, similar to 2014, since buyers will continue to patiently wait to pay only the Fair Market Value for a home. Many buyers will sit on the fence and wait until the market turns more to the buyer’s favor, which, at best, will only tip slightly during the second half of the year.
  • For the first half of the year, expect mild appreciation from 1 to 3%. By year’s end, that appreciation will be all but wiped away and year over year appreciation by the end of December will be close to zero.
  • The housing market will follow a normal housing cycle.  The strongest demand coupled with a lot of fresh inventory will occur during the Spring Market, followed by slightly less demand and a continued fresh supply of homes in the Summer Market, then another drop in supply and fewer new listings in the Autumn Market, and, finally, all the distractions of the Holiday market will be punctuated with the lowest demand of the year and few homeowners opting to sell.
  • The number of successful, closed sales will be similar to 2014 levels. There will be an increase in the number of “move-up” sellers, which will prove to be a very smart decision as mortgage rates rise.
  • The distressed inventory will remain low with a very similar level of successful short sales and foreclosures, representing just a few percent of all sales by year’s end.
  • Even though rates have remained low for several years now, they have remained at these levels due to the Federal Reserve’s manipulation of the monetary system. Now that the secondary market is now functioning, the next healthy step is to start increasing the Federal Fund Rate, which will result in increasing mortgage rates. If they take that step and increase the rate at a few of their meetings (they meet eight times per year), expect interest rates to increase to about 4.875%, knocking on the door of 5%, levels not seen since 2009.

 

The bottom line, 2015 will feel a lot like 2014. Buyers will be greeted with the frustration of sifting through overpriced homes, while sellers will slowly come to the realization that the market continues to be all about the price. This tug of war of market expectations will be the overall theme of 2015. As wise sellers adjust their expectations to reality, they will achieve success. By year’s end, home values will have changed very little and the threat of rising rates will motivate both buyers and sellers alike to make a move.

 

Information deemed reliable but not guaranteed.  
Report provided by Steven Thomas Reports on Housing