Are increasing home sales volumes based on fundamentals?
When the bear rally of 2009 began, I consistently stated the rally would not hold. My reasoning was simple: the housing market was still inflated and the demand was artificial. For the housing market to put in a durable bottom, several factors must be in place:
- All market props must be removed. The demand must be natural.
- Prices must be at or below rental parity. Prices must be affordable for a bottom to be durable.
- Rents must be rising. Rental parity must not be declining for resale prices to be stable.
- Employment must be rising or stable. Rising unemployment hinders demand.
- Supply must not exceed demand.
None of these conditions were met in 2009, but what about today?
The tax incentives are gone, but artificial interest rates remain. Eventually mortgage interest rates must rise, but the Federal Reserve seems determined to keep these rates as low as they can as long as they can to put a bottom in the housing market. The artificially low interest rates are the biggest long-term worry facing the housing market (see The housing recovery that wasn’t).
Prices are at or below rental parity in most markets including most of those in Orange County. Even Irvine is currently trading below rental parity.
Rents are rising across most of the country including Orange County. Rising rents are coming from a combination of increasing employment and a tightening rental market.
Unemployment is still bad, but the economy has turned the corner, and unemployment is getting better.
That brings us to our final criteria: supply must not exceed demand. This one has not been met yet. In fact, excessive supply will be the primary reason prices will chop around and likely continue to decline over the next few years. The remaining fundamentals are favor sustained growth in demand and higher prices, but the huge overhang of supply will trump these positive signs.
Orange County’s homebuying year got off the a “staggering” quick start, says Steve Thomas of ReportsOnHousing.com.
The latest Orange County home inventory report from Thomas — data as of January 19 — estimates that the local market’s speed quickened 12.6% in the past two weeks and quickened 32.7% in a year. He writes:
In comparing the beginning of this year to last year, the numbers are staggering. Overall, demand, the number of new pending sales over the prior month, is up 15% compared to 2011, totaling 2,528 pending sales. That’s the market as a whole, though. For homes priced below $500,000, demand is up an astonishing 30%. That’s a lot of momentum considering the housing market hasn’t even hit its stride with the beginning of the Spring Market right after Super Bowl Sunday. This is more than an encouraging start to 2012, it is a real sign of a much different housing market for 2012.
Are the numbers really “staggering” or is he exaggerating for effect?
Thomas calculates a “market time” benchmark tracking how many months it theoretically takes to sell all the inventory in the local MLS for-sale listings at the current pace of pending deals being made. By this Thomas logic, as of last Thursday, it would take:
- 3.20 months for buyers to gobble up all homes for sale at the current pace vs. 3.65 months two weeks ago vs. 4.75 months a year ago vs. 3.02 months two years ago.
- Of the 8 pricing slices Thomas tracks, 5 had faster market time vs. 2 weeks ago; and 6 improved over a year ago.
- Homes listed for under a million bucks have a market time of 2.82 months vs. 10.26 months for homes listed for more than $1 million.
- So, basically, it is 3.6 times harder to sell a million-dollar-plus residence!
- And just so you know, the million-dollar market represents 17% of all homes listed and 5% of all homes that entered into escrow in the past 30 days.
Here’s the recent data, as of last Thursday, for listings; deals pending; market time in months; last Thursday vs. 2 weeks ago, a year ago and 2 years ago. Color coding for market time is red (slowed by 5%-plus in year); green (sped up by 5%-plus in year); and yellow (in between!) Note: k=thousand; m=million …
Slice Listings Deals Market Time (months) 2 week ago 1 yr. ago 2 yr. ago $0-$250k 1,575 589 2.67 3.05 4.10 2.27 $250k-$500k 2,954 1,231 2.40 2.76 4.08 2.03 $500k-$750k 1,545 436 3.54 4.20 4.75 3.04 $750k-$1m 700 146 4.79 5.01 4.87 4.75 $1m-$1.5m 489 78 6.27 8.94 6.28 5.73 $1.5m-$2m 288 32 9.00 8.50 11.97 13.50 $2m-4m 372 23 16.17 12.30 15.36 19.52 $4m+ 226 1 226.00 28.63 67.25 24.33 All O.C. 8,080 2,528 3.20 3.65 4.75 3.02
The various segments of the market will bottom at different times. The lowest tier of the market will bottom first. As these buyers gain equity, they form the basis of a move up market which will support higher market strata. The high end will bottom last.
Irvine Renter becomes an OC Register contributor
I guess I have hit the big time. I will now be contributing regular posts to the OC Register. I want to present an accurate depiction of market conditions to as many people as I can. That’s why the OC Housing market report is free to all, and it’s why I will now be contributing to the OC Register. I want to thank Jon Lansner for this opportunity to reveal to the broader OC readership what is really happening in our local housing market.
January 30th, 2012, 9:00 am — Jon Lansner
Larry Roberts has cultivated a loyal following as author of the Irvine Housing Blog and now the Orange County Housing News blog. Staring today, he’ll provide our blog with his occasional take on local homebuying patterns …
Nearly every city in Orange County has seen declines in the dollars-per-square-foot measure of home sales.
The monthly housing market reports at the O.C. Housing News focus on the year-over-year change in dollars-per-square-foot. Why? Because this measure is less affected by the changing mix of sales and provides a better measure of what value buyers were obtaining for their money. Further, the year-over-year comparisons take out the strong seasonal changes we see as house prices rise in the spring and decline in the fall. The data is also smoothed for a three-month average to further remove variability caused by other factors including a small sample size. The result is a fairly smooth and consistent report on the general direction of home prices and the strength of the move.
Right now, the trend is distinctly down — minus 5.5% in the year ended in December.
Here’s the five weakest markets, in the year ending in December, by O.C. Housing News math:
- Laguna Niguel, -12.2%
- Costa Mesa, -11.2%
- Rancho Santa Margarita, -9.6%
- Westminster, -9.5%
- Aliso Viejo, -9.2%
There isn’t much observable pattern to the losses. They are widespread and severe. Even a few of the “immune” beach communities are feeling the pressure on pricing:
- San Clemente, -8.2%
- Huntington Beach, -7.7%
- Corona Del Mar, -5.6%
- Newport Beach, -5.4%
Only two towns are going against the downward trend. The five best performing markets are as follows:
- San Juan Capistrano, +4.7%
- Newport Coast, +1.2%
- Laguna Hills, -1.3%
- Dana Point, -1.3%
- Laguna Beach, -2.0%
The Orange County housing market is very weak despite its relative affordability. With the plethora of REOs and upcoming shadow inventory, prices should continue to weaken. Eventually, the payment affordability will motivate enough potential buyers to act to mop up the inventory, but the market will likely show declining prices as the inventory is absorbed.