Orange County for-sale housing inventory explodes
A late season influx of for-sale housing inventory caught observers by surprise. Since it’s cloud inventory, the weight will not push prices lower.
The Orange County housing market has a large number of cloud inventory listings, sellers who can’t reduce their price because they need to pay off a big loan. No matter how much of this inventory comes to market, it won’t put downward pressure on prices because it isn’t must-sell inventory, it’s can’t sell inventory.
As mortgage rates rise, potential buyers can’t finance the asking prices these sellers need to complete a sale, leaving an old-fashioned Mexican standoff where neither party can pull the trigger. The market may stall and go nowhere.
What are the potential outcomes?
It’s possible that mortgage rates will fall again, and the rally will continue. With the imminent fed rate increase, this doesn’t seem a likely scenario.
It’s possible that buyers and sellers will be frozen in their unarmed Mexican standoff and sales volumes will fall. This scenario does seem likely. To some degree, this will come to pass over the fall and winter.
Prices will be volatile. We may see pockets where prices rise significantly, and we may see areas where prices completely stagnate. This will probably play out in a random fashion depending on what neighborhoods and communities attract the remaining buying interest and what ones don’t.
I expect the buying interest to be strongest in the most undervalued markets because the marginal buyers who find themselves priced out of the neighborhoods they really want substitute down to bargain neighborhoods. As the market pauses to catch its breath, the uneven relief rally may even itself out.
Orange County homeowners are late to the party this year, with a summertime listing spree pushing the inventory of homes for sale to a 10-month high long after buying peaked in early spring.
The latest edition of Steve Thomas’ ReportsOnHousing shows the supply of homes for sale rose 27 percent in the 16 weeks from April 9 to July 30. At the end of July, Orange County had 7,116 homes listed for sale, compared with 6,935 homes two weeks earlier – an increase of 2.6 percent.
The surge in new listings comes amid a seasonal slowdown in house hunting. In the 30 days ended July 30, 2,698 homes went into escrow. That’s the lowest demand since February, and it’s down from 2,810 in the 30 days ended two weeks earlier – a drop of 4 percent.
Last year inventory peaked in June, and by June 2015, our inventory was about the same as last year, but rather than peaking in June, the local housing inventory has continued to balloon, up 13.9% in July.
The reasons for this unusual event shouldn’t be a mystery to regular readers here. For-sale housing inventory has been chronically low since early 2012 when lenders changed their policies to create cloud inventory. Once prices reach the outstanding balances of the segment of the market still underwater, those people have opportunity to sell, so some of them list.
The reason we are seeing a late-season surge now is because the new, higher comps set this spring provided a potential exit to many cloud inventory borrowers. Once these owners saw their opportunity, they listed their homes when most would-be sellers are considering lowering their prices or removing their listings.
It’s not clear why property owners took so long this year to act – or what’s motivating them to sell now. Do they want to cash in on a surprisingly strong market? Or do they feel some sense of anxiety about the future of real estate prices?
What reason do owners have to feel anxiety? Many probably believe their house’s value will rise 10%+ every year forever.
For those who understand the implications of rising mortgage rates, they must consider that their home may be difficult to sell for peak values over the next three to five years as mortgage rates rise. There will be times when borrowers may not be able to finance the amount the seller needs to get out.
Thomas hopes sellers entering the market have realistic views about what their homes are worth.
“Sellers wishing to stretch the price will simply sit on the market until they finally wake up to the reality that they are overpriced and will attract no offers,” Thomas wrote. …
This will be the fate of the late cloud inventory additions to supply. These sellers can’t lower their price, so their properties will sit there until they decide to remove the listing. (See: Are cloud inventory homes really for sale?)
La Palma, where the average listing is $624,000, had the biggest percentage-point jump in supply since the start of April. Its 23 listings are up 109 percent in 16 weeks. Even if you see a tiny city as a statistical anomaly, far bigger Costa Mesa ($853,000 average listing price) had the next biggest supply gain – up 60 percent to 168 listings.Eight other markets have supply increases of 40 percent or more since April 9:
• Los Alamitos, $786,000 average price: 19 listings, up 58 percent.
• Mission Viejo, $725,000 average price: 279 listings, up 57 percent.
• Dove Canyon, $960,000 average price: 28 listings, up 56 percent.
• Cypress, $624,000 average price: 70 listings, up 49 percent.
• Fullerton, $810,000 average price: 259 listings, up 45 percent.
• Ladera Ranch, $1.2 million average price: 172 listings, up 45 percent.
• Laguna Hills, $1.3 million average price: 117 listings, up 43 percent.
• Irvine, $1.2 million average price: 688 listings, up 42 percent.
In the period from April 9 to July 30, as sellers listed like mad, buyer demand – measured by new escrows opened – fell by 13 percent. …
Housing bears all look at the huge numbers of delinquent and underwater borrowers as potential future must-sell inventory. As I pointed out in Las Vegas: a case study in successful housing market manipulation, the relaxation of mark-to-market accounting rules circumvented the normal market-clearing mechanisms that would have forced the sale of millions of properties. As a result, shadow inventory kept waiting in the shadows, and it never hit the MLS. Finally, lenders went “all in” betting on success of loan modifications because each modified loan is one less unit languishing in shadow inventory, and one less potential sale for a loss through foreclosure or short sale.
As prices get closer to the peak the cloud inventory will start to appear, and the rate of appreciation will slow. Of course, by then the kool aid intoxicated bulls won’t believe the party won’t go on forever, but cloud inventory is out there, and it will take many years to push through it all and get back to a market where sellers have equity and buyers aren’t subsidized.