By Steven Thomas
RISMEDIA, Jan. 22, 2008-There’s no more eggnog in the refrigerator and already New Year’s resolutions are being put off until next year. These are great reminders that the holidays are in the past and the housing market’s engine is beginning to thaw. There is a buzz in the coffee room again as more and more buyers are being chauffeured around Orange County in search for their home. This is cyclically the time that the real estate market ramps up as buyers start entering the market.
By the end of January, demand will be significantly higher as more and more sellers start placing their homes on the market in anticipation of the Spring market. However, sellers should know by now that the Spring will be tempered by rising inventory and lower demand, similar to 2007. The current active inventory is at 14,944 homes, a 1,184 home drop in the past four weeks, or 7%. On January 1, the active inventory started the year at 14,724 homes; so, the inventory is already growing in anticipation of a better market. Demand, new escrows within the past month, dropped 34 homes in the past two weeks to 997 escrows. On January 1, demand was at 944 escrows, so it too is already growing. Market time dropped slightly in the past two weeks from 15.05 to 14.99 months. Last year at this time, there were 11,643 homes on the market, demand was at 1,496 escrows and the market time was at 7.78 months. The inventory last year compared to this year is very similar in almost every price range with the exception of properties listed below $500,000. Last year, there were 3,083 properties listed below $500,000 versus 6,129 today, nearly double.
The subprime fallout really hits homeowners in that range. 42.1% of all properties below $500,000 are either a short sale or a foreclosure. If you look at just detached homes, that number climbs to 56.7%. 67% of ALL short sale and foreclosure activity is below the $500,000 mark as well. So, it is no wonder that range is being hit the hardest. With so many homes in the lower ranges weighing down the inventory, expect the median price (that’s the middle value sold in a month) to continue to drop. Two years ago, there were 7,635 homes on the market, demand was at 1,573 escrows and the market time was at 4.85 months.
Currently, the condominium market is a bit better than the detached home market. The condominium market is at a 14.27 months supply compared to 15.14 months for detached homes. 31.3% of the current active inventory is vacant. For condominiums, the vacancy rate is actually 35.8% compared to 29.2% for detached homes. 29% of the active condominium inventory is either a short sale or a foreclosure versus 24.3% of the detached home market.
What can we expect in 2008? Look for Capitol Hill, the Bush Administration, and the Federal Reserve to really address the Financial Crunch in the first half of the year. Everybody is beginning to realize that lowering rates will not restore liquidity to the financial markets. Instead, we will most likely see a change to the conforming loan limit from $417,000 to $625,000, and some sort of troubled homeowner bailout. It is an election year and everybody is going to want to be part of the solution to restoring the U.S. economic engine. Until then, we can expect further tempered demand.
As January rolls along, expect demand to rise from current levels. After the Super Bowl, the official start of the Spring Market in sunny California, demand will continue to rise, at about 80% of last year’s levels, and the inventory will rise. It is silly, but many homeowners are still banking on the spring market as the perfect time to sell. Market time will drop somewhat during the spring this year, but will remain above a 10 month market. The summer market, June through the first few weeks of August, will be marked by a further increase in the inventory and a slight drop in demand from spring’s highs. Unfortunately, many sellers will continue to place their homes on the market because it’s sunny and summer. Summer is when many buyers want to already make their move in anticipation of the coming school year. It starts to get a little late to just open up an escrow the further summer winds down. Market time will grow during the summer market.
In the Autumn market, the end of August through Halloween, the current active inventory typically reaches a peak and then starts to drop as many sellers throw in the towel, anticipating the slower market to come. The active inventory will peak at around 20,000 homes. Demand will drop slightly and Market Time will not change much. The Holiday market, from Halloween through the first couple of weeks of the New Year, will show the largest reductions of the year in inventory due to sellers pulling their homes off the market. Demand will drop to its lowest levels of the year. We can expect market time to rise if not enough homeowners pull their homes off the market.
Buyers, what to do? I am consistently ridiculed for recommending buyers to purchase in this market. I must be biased, right? Not so fast. I thought it was a great time to purchase back in 1995 when the newspapers, television and the droves of buyers sitting on the fence highlighted the ill effects of the then current downturn. Everybody was waiting for the bottom. The only problem is that nobody rings a bell when we hit the bottom of the real estate market. Instead, many did not purchase in 1995, nor 1996, but opted to wait until 1997 or later, after prices were already on the rise. Nobody knows it’s a bottom until well after the bottom. Do not buy if you are looking to move in just a couple of years. But, if you are planning on living in your home for longer than just a couple of years, your timing could not be better. First, prices are soft. They average sales to list price ratio 94%, so take that into consideration before writing lowball offers and wasting tremendous time. Second, there are a ton of choices. Buyers were begging for more choices three years ago. There are many more homes to see in isolating the perfect home for your family.
Third, and often the most ignored, rates are at historical lows and as soon as the market rebounds, rates will rise, cutting into affordability. For example, a home at $650,000, 20% down with a 6.5% interest rate will have a monthly payment of $3,280. If prices were to drop another 10% for the year, but rates were to increase to 7.5%, the $650,000 home would become $585,000 but the monthly payment would still be $3,272, almost unchanged.
If rates were to increase to 8.5%, the same rate as in 2000, the payment would then increase to $3,599, an increase of $319 per month. If rates were to increase to 10.5%, the same rate as 1990, the increase in payment would be $1,001 per month! So, it is not JUST about price. Third, for those waiting for the sky to fall to much more affordable levels and expecting gigantic drops, that is what many buyers were anticipating during the downturn of the 1990′s and the early 1980′s and… It’s real simple, regardless of the downturn, there is stickiness to pricing. Prices just don’t return to prior run-up levels. Finally, Southern California, with low humidity, a lot of sunshine and plenty of outdoor activities is not only a great place to visit, it is historically a wonderful long term investment and a great place to call home.
Sellers, what to do? For sellers, the answer is much simple: place your home on the market only if you really MUST sell and have no other choice.
Dress your home for success; meaning, market your home in the best possible condition using builder model homes as an excellent reference point. Best in condition, best in location and best in price equate to a successful sale. Have your home in showing condition on day 100 and not just the first few weeks; you never know when the buyer of your home will come walking through the door. There is a ton of competition, so pricing is essential; the better the price, the better the chances. In arriving at price, use only homes in escrow, very recent sales and aggressive listing prices. If you don’t have the best location, price your home accordingly. Lastly, remember there are 14,944 homes on the market and only 998 were placed into escrow within the last month. Given last month’s demand, 13,946 sellers will not be successful in selling their homes over the course of the next month.
Steven Thomas is president of RE/MAX Real Estate Services.
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