Below is the latest Orange County Market Update & 2012 Forecast from ReportsOnhousing.com
Source: Steven Thomas, reprinted with permission - January 7, 2012
Forecasting: The housing market is in uncharted waters.
The current protracted economic downturn has generated a lot of uncertainty. The uncertainty is a direct result of economists and academia not being able to get a handle on properly prognosticating where we go from here. That is because we are currently in uncharted waters. Employment, housing, Europe, China, it’s all intricately tied together. They have all been affected and any changes have an impact on everything. Show me an economist or expert that predicted the Euro financial mess and how it would drive United Statesinterest rates to an all time historical low. Interest rates dropped significantly and have been bouncing around 4%; yet, the consensus predicted a rise in rates. The trouble is that economic forecasting draws from historical data to extract conclusions for the future. What happens if we have nothing to draw from? That’s where we are today. For every economist or expert that predicts gloom, I will show you another that predicts sunny skies ahead. Not only are we in uncharted waters, but the world is now experiencing the too much information age. Never before has society had so much instantaneous information at their fingertips. The Internet revolutionized society, but the smart phone took it to an entirely new level. Our phone has become our newspaper, our social network, our television, our music player, our email, our mobile office… oh yeah, we use it to call people too. With the Internet and the smart phone, we are all tied to a new way of existence, instantaneous information. The current too much information age has a major impact on the world economy too and is unlike any other time in history, contributing to the uncertainty of where we are going from here.
Today, forecasting is more of an art than an exact science, but I think we can all agree, it’s not going to change much this year. It’s going to feel like the Chevy Chase movie, Groundhog Day, more of the same, déjà vu all over again. Here’s how I think 2012 will unfold:
- Demand: A return of a normal housing cycle.
In 2011, demand followed a normal housing pattern. The Spring Market experienced the most demand, followed by a slightly slower Summer Market, then a slightly slower Autumn Market, and finally a much slower Holiday Market. It was a refreshing predictable normal market. There wasn’t the influence of a first time home buyer tax credit or the sudden tightening of credit to monkey with demand like there had been for the prior three years. In 2012, demand will follow in the footsteps of 2011, just slightly better, about 5%. Currently, the housing market is shaking off the effects of the holiday stupor. For the lower ranges, below $750,000, which accounts for 76% of the listing inventory, the market will become really hot quickly as we roll into the spring, even quicker than 2011. This year, the active listing inventory is starting off with 19% fewer homes compared to a year ago. With fewer homes on the market and similar demand, the market is going to be a bit more heated right out of the box. Multiple offers and sales prices close to their asking prices will be the norm, especially for homes priced below $500,000. Of course sellers need to price their homes accurately or they simply will not have success. Buyers are unwilling to pay extra for a home, regardless of the number of offers on the table. Would you? Today “spreadsheet” buyers carefully pour over recent sales and pending homes to arrive at the price. In the lower ranges, it will remain hot until the market finally decelerates a bit with the Autumn Market. For homes priced between $750,000 to $1.5 million, 14% of the active inventory, the market will heat up during the spring, just not as much as the lower ranges. Pricing will be the fundamental ingredient in order to be successful, as this range tends to be too optimistic right when they first hit the market. For homes priced above $1.5 million, 11% of the active inventory, the market is the antithesis of the lower ranges, a deep buyers market that will not only require accurate pricing to be successful, it will require time and patience as well. There are just too many sellers vying for a much smaller pool of potential buyers.
- Pricing: Pressures on price totally depend upon the price range.
In Orange County, there are three distinctly different markets inOrangeCounty. It would be a mistake to make decisions based upon expected pricing for the entire county. So, throw out reports of the median sales price and drill down a little bit deeper. Let’s take a look at the three totally different markets. In the lower ranges, we can expect very little change in pricing. Remember, 76% of the market is below $750,000 and 56% can be found below $500,000. I believe that in some unique areas and neighborhoods, the market could even appreciate slightly. But, distressed properties, 47% of the active inventory in the lower ranges, will keep a lid on any real appreciation. For the middle range, homes priced between $750,000 and $1.5 million, we can expect slight depreciation in prices, less than 5%. Since only 15% of this range is distressed, the pressure on pricing is not as great. In the upper ranges, above $1.5 million, distressed properties do not have as much of an impact, only 5%. Instead, there are just far too many sellers and not enough buyers. Values in the lower ranges dropped over night with a flood of distressed homes, and have subsequently stabilized. The upper ranges have not been inundated with distressed properties; thus, the downward movement in values has been a much slower process. In essence, they are arriving late to the party. Prices are a lot stickier with less distress, but applying simple supply and demand rules, success often comes at the hands of more aggressive pricing. In 2012, prices will be most volatile in the upper ranges just as they were in 2011.
- The Active Listing Inventory: Who will show up, prudent sellers or optimistic homeowners looking to test the water?
The active listing inventory has 19% fewer homes on the market this year compared to last. That will help spur immediate demand which will attract multiple, strong offers. This also occurred in 2010 with even 10% fewer homes at the beginning of the year compared to today. People misinterpreted all of the activity to mean that the housing market had recovered. So, way too many homeowners tested the water and overpriced their homes. The active listing inventory grew by 40% that year. In a downturn, overpriced homes do not sell; they stay on the market until the price is reduced or they throw in the towel and pull their home off the market. Homeowners had been paying attention and in 2011 after increasing by only 14% for the first half of the year, the housing market dropped by 26% for the second half. I am afraid that homeowners have selective memory. Prudent sellers were evident in 2009 and 2011 and foolish homeowners showed up in 2008 and 2010. In 2012, I expect foolish sellers who want to test the market will return, maintaining the pattern of showing up every other year. Ultimately, overpriced properties will stay on the market and the active listing inventory will continue to grow for the first three quarters.
- The Distressed Market: There will not be much of a change in terms of distressed properties, playing a major role in the market.
I don’t know why, but I still keep hearing that a major increase in foreclosures and distressed activity is at our doorstep. Okay, that’s enough. I have been hearing of a wave of foreclosures for three years now. MEMO TO EVERYBODY: there will NOT be any significant changes in the numbers of distressed properties. Please stop spreading this rumor. What you see is what you get. The banks have come up with their strategy for distressed homes and they are not about to make any major changes. Many people have stated that it would be best to let the market work through all of the distress on its own and banks should just open the flood gates. Once again, that is NOT going to happen. First off, banks are not intentionally holding foreclosed properties off of the market here in Orange County. Foreclosures are a hot commodity in the OC. Currently, there are only 620 foreclosures on the market in the entire county and the expected market time is 1.76 months, the slowest time of the year. Ask any buyer who has attempted to pursue a foreclosure and you will find that it extremely difficult to land one. Landing a foreclosure is as easy as finding a Cabbage Patch doll during Christmas in the 1980’s: almost impossible. So, there is simply no reason for a lender to intentionally hold these homes off of the market. They do inLas Vegas,Phoenixand other areas where there are a disproportionate, outrageous number on the market. There are plenty of homeowners who have defaulted and the banks have been slow to foreclose. Many are short sales. Currently, there are 2,517 short sales on the market and 5,144 that are pending. Yet, only about 500 short sales close each month. Short sales, which require lender, or often lenders approval to take less than the loan amount, are complicated and take a very long time to put together. This too is not going to change anytime soon. It is important to highlight the fact that short sales have an expected market time of 2.5 months, also hot compared to the rest ofOrangeCounty. So, lenders are not going to change course at this point and adopt a different strategy. They aren’t going to quickly foreclose on everybody and let the market work itself out. You don’t have to be an economist or expert to understand that if you suddenly flood the market with foreclosures that prices will freefall again. If prices dropped significantly again, more homeowners would be under water, confidence would drop, unemployment would increase and the economy would fall into a deep abyss. That’s not going to happen. Realize that lenders have adopted a process and they are going to stick to it. For the year, there will be a slight increase in the number of closed foreclosures and short sales, about 5%, but don’t expect any significant changes.
Interest Rates: Record low interest rates will NOT last forever.
Interest rates are probably the single most unpredictable feature of the housing market. Nobody has got it right thus far and current forecasts are all over the board. Prognosticating the future of interest rates is like throwing darts at a dart board from all the way across the street. I will go out on a limb and predict interest rates increasing to 4.5%. I just don’t see the international flight to safety,US bonds, changing anytime soon. But, understand that it is not a matter of if interest rates will eventually rise, it is when. The Federal government has dumped trillions of dollars into the system. When that happens, the threat of inflation increases and someday becomes a reality. To fight against inflation, interest rates will rise. Unfortunately, everybody has got so used to historically low interest rates that nobody is preparing for that inevitable day. The current interest rates coupled with lower prices has made housing extremely affordable. If you take the median price and apply it to the current interest rate and then compare it to the median price and average interest rate of past years, you have to go all the way back to the year 2000 to find similar payments. In 2000, interest rates were at 8%. In 1990, interest rates were at 10%. In 1980, interest rates were at 16%. It’s funny what you get used to. 4% interest rates are a once in a lifetime phenomena. Cashing in now means that a buyer has a low payment every single month for 30-years.
Closed Sales: Despite headlines, the number of closed sales really has not changed much over the past several years.
The number of sales is below the long term average; BUT, there are still about 27,000 residential resales taking place each year. 2007 and 2008 were record slow years. 2009 through 2011 were much better. In 2012, there will be very close to the same number of sales again, and they will follow a normal cycle, just like demand. Expect a slight increase in the number of sales, about 5% for the year.
The bottom line, 2012 is going to an awful lot like 2011. It will feel like we are experiencing déjà vu with only minor tweaks here and there. With all of the analysis, Americans are glossing over some very important facts about interest rates. They fail to consider the astronomical impact of the current historical interest rates on the mortgage payment that they are going to pay every month for 30-years. This will not last. Most have forgotten that home ownership in Orange County is an excellent long term investment. You can bank on the golden coast of Southern California. It’s basic supply and demand and builders are running out of buildable raw land. Finally, it is time that society returns to the realization that there is intrinsic value to owning a home. It’s not just a paper certificate, like in stocks and bonds. It is home.
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For questions about buying and selling real estate in Orange County, contact Scot Campbell. He is the President of The Scot Campbell TEAM at Coldwell Banker-Campbell Realtors in Huntington Beach, CA. He has been a licensed broker for over 21 years and has brokered over 1000 homes and just about every type of transaction imaginable. On his website you can search for homes and obtain an instant home value report: www.RealtyDigestOnline.com He can be reached at 714-960-0700 at the office, 714-336-0394 on his mobile number or via email at Scot.Campbell@ColdwellBanker.com
