Did the OC housing market come alive in February 2015?
Early reports are that OC housing demand is picking up early. Is this an anomaly caused by low mortgage rates or the beginning of a new sustained rally?
The Orange County housing market, like other Coastal California housing markets, is subject to extreme price volatility and sudden changes in the delicate balance between buyers and sellers. The chronic shortage of available housing causes most of the problems.
In late 2007, the credit crunch caused buyer demand to evaporate, and by early 2008, foreclosures flooded the MLS with supply creating a deep buyer’s market. In 2009 the with stimulus from tax credits, the market changed again, and sellers found plenty of eager buyers to absorb whatever was available. When the tax credits expired, the buyer demand vanished, and until late 2011, it was clearly a buyer’s market.
In early 2012 as lenders dried up the foreclosure inventory from the MLS, the lack of supply abruptly changed the market from a deep buyer’s market to a deep seller’s market in just a few months. Demand didn’t increase much in 2012, but the lack of supply forced the few active buyers to compete for scarce inventory.
Then in May of 2013 mortgage interest rates abruptly rose, affordability crumbled, and the deep seller’s market ground to a halt. Since then, the market has been fairly balanced with sellers gaining some advantage in spring and surrendering the advantage to buyers during the fall and winter.
The market displayed its usual winter doldrums in January, but early reports are the February showed surprising strength, and the homebuying season may be off to an early start.
By JONATHAN LANSNER / Staff Columnist, March 3, 2015
… The latest biweekly report by veteran Orange County real estate tracker Steve Thomas – which follows sales and inventory information within real estate brokers’ listing systems – shows the local market catching fire since the Super Bowl, the unofficial opening of the traditional house-hunting season.
As of Feb. 26, demand for Orange County existing homes is surging. There were 2,891 new escrows opened in the previous 30 days – basically double from the start of the year and up 18 percent from a year ago.
First, January 1 is nearly always the bottom of inventory and sales for the year. Everyone expects a large increase in escrows from the start of the year.
Second, while it’s good that escrows are up versus last year, 2014 was truly dismal, particularly the first quarter.
Meanwhile the house hunting gets trickier. Supply, in the form of homes officially listed for sale, hasn’t budged. The county listings total of 5,443 homes for sale is all but flat from a year ago.
If sales increase and inventory does not, either prices will go up significantly, or the sales rally will fizz out due to lack of supply. Hopefully, stories like this one will bring out more hopeful sellers, but with many still trapped in cloud inventory, any new listings will have bubble-era prices.
Thomas calculates a metric he calls “market time,” which compares the rate of new escrows opened with the outstanding supply of existing homes for sale. In essence, market time is a measure of how quickly a home might sell in current conditions.
His latest measurements put market time at 56 days. That’s the second-speediest end-of-February reading since the Great Recession, and a noteworthy improvement over the market time of 66 days he recorded this time last year. It’s what Thomas classifies as a “seller’s market.”
Shevy relayed to me the same observation. Over the previous three months, the market was slow with a slight advantage to buyers, mostly because they were rare. The increased activity and flat listings is tilting the balance in favor of sellers, where it usually is in supply-starved Orange County. Overall, Shevy feels the market is still balanced. Well priced properties quickly go into escrow, often with multiple offers, and poorly priced properties sit there with no activity.
But the stunning change is what happened last month – a drop from market time of 78 days at the start of February to the current 56 days. My trusty spreadsheet tells me the 22-day drop over just four weeks is by far the steepest in this period since the recession ended.
“It was like the market took a right turn,” Thomas said. “This was something totally out of the blue.”
Resale homes sold through the broker system are the vast majority of the market, but new home developers also privately report a nice rebound in their sales in February. Purchases of newly built Orange County homes have doubled in two years and now account for 1 in 8 of all residences changing hands.
Considering January’s sales were 41% below 2014’s poor showing, a rebound was expected.
Plus, I imagine Lansner received a number of phone calls from the OC Register’s advertisers who privately reported they preferred him to pump the market with good news to help sales; thus we have today’s overly upbeat report to make up for the depressing report last week on new home sales.
It’s all a quick turnabout from late last year when numerous real estate pros were getting antsy about what had been a disappointingly slow second half of the year. Much of the blame then was placed on rising home prices, which supposedly scared off shoppers.
Rising home prices didn’t “supposedly” scare off shoppers: rising home prices did scare off home shoppers, and priced many marginal buyers out of the market.
The number of closed home sales last year was 8 percent below 2013’s pace, CoreLogic DataQuick reported. The median selling price rose 4 percent in 2014 after jumping 21 percent in ’13.
January buying was slow, too. Then all of a sudden – with no major change in pricing or mortgage rates or the broader economy – shoppers stopped shopping and started making offers.
“I’d like to know what buyers are thinking. Why did they start pulling the trigger now?” Thomas says. “It’s like we’ve gone from 5 miles per hour to 65 in a very short distance.”
I’ve noticed over the last several months affordability has been improving, mostly due to falling mortgage rates. Increasing affordability “prices in” marginal buyers and increases demand.
My rating system improved it’s outlook on OC real estate due to improving affordability and more stable conditions for rent and appreciation.
Thus, the big question for Orange County’s housing market has gone from “When will it wake up?” to “How long can this surge last?”
Will February prove to be just a short-lived, unexpected rush of buyers wanting to start the year in a new home?
It depends on mortgage rates. As I stated in Bold California housing market predictions for 2015, “If mortgage rates remain below 4.25%, both sales and house prices will rise next year. The economy is improving, and with an improving economy will come increased demand. If this demand is amplified by super-low rates, housing will do well.” Well, mortgage rates are below 4%, so housing is affordable and buyers are buying.
Did folks get overly anxious about the possibility of potentially higher home prices or costlier mortgages later this year?
“Pat Veling · Top Commenter
Pretty sure the “right turn” is due to recently and suddenly increasing interest rates.
While still low, a bump from 3.25% to 3.50% is actually more than a 7.5% increase in interest charged and paid. Nothing will move buyers “off the fence” more than realizing they may have missed a low point in rates or values in the current cycle.
It seems that values continue to climb, and interest rates have nowhere to go but up. If that’s not a sign to buy now, I am not sure what is.”
Mr. Veling runs his own data company in OC. Somebody must pay him for his insightful analysis.
Or is this the market breakout where improved housing fundamentals, most notably a healthy job market, nudged buyers to act? Is there a growing flock that’s tired of renting or having roommates – parents or otherwise – and have joined the traditional hunt for home ownership?
“The jury is still out,” says Thomas, who sounds a but skeptical of the rally’s staying power.
One hot month is not a trend. And the pending sales that Thomas tracks – deals in escrow awaiting final paperwork and financing – are not guaranteed sales.
The months of supply calculation is a widely known market gauge with an accepted interpretation: more than 6 months of inventory is bad and less than 6 months is good. In order to manipulate this statistic, the denominator (home sales) needs to be as large as possible. Anything which overstates home sales directly impacts the months of supply, which is why Steve Thomas uses pendings rather than closed sales.
Steve Thomas’s methodology consistently understates the months of supply, but he continues to use the standard interpretation of 6 months being a balance point. His system predicted a crash in 2004 — right before house prices doubled.
Later the time on market fell below 6 months for most of 2008, a sign of an improving market, just as prices were crashing hard. Then in 2009 and 2010 when we had a stimulus rally, months of inventory ballooned and suggested prices should go down.
In short, months of supply is a worthless forecasting tool.
But rarely do you see an out-of-nowhere buying binge like housing witnessed in February.
At a minimum, it’s an intriguing start to the springtime housing rush.
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.
The housing market bottomed in the spring of 2012, so his enthusiasm was warranted, and although he didn’t make a clear statement calling the bottom, he became enthusiastic at an opportune time to buy a house in Orange County.
Will 2014 follow the same trajectory as 2012? Will this year see a huge price rally on significant volume due to an improving economy?
Given the tenuous state of affordability and the likelihood of higher mortgage rates, I have doubts, but I also place faith in my monthly reports that show affordability is currently good and buying during periods of true affordability has never turned out poorly.