Orange County Housing Report: A 2019 Forecast

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HAPPY NEW YEAR!

Now, what does that mean for Orange County real estate?

Active Inventory – The active inventory climbed all year and peaked much later than normal.

The year started with an active inventory of 3,397 homes. It was the second lowest start to a year behind 2013’s incredibly low 3,161 homes. Ever since the Great Recession, the trend has been fewer homeowners selling their homes. Since 2009, the number of homes placed on the market has diminished by 29% compared to the heydays of 2000 through 2007. In 2018, there were 3% more homes listed for sale compared to 2017, a little over 1,100 homes.

After a six-and-a-half year run in housing, 2018 was the year of a shifting market where many cracks emerged. The active listing inventory continued to climb from the very start of the year and did not peak until the middle of October. Typically, the active inventory peaks somewhere between July and August, right before the kids go back to school and the market transitions to the Autumn Market. That did not happen this year. Instead, the active inventory peaked a couple of months late at 7,292 homes, slightly higher than the prior six-year average of 7,173. Normally, the active inventory drops for the remainder of the year right after peaking, but not in 2018. This year’s peak was more of a plateau, lingering around the 7,200 mark for an additional month. It was not until Thanksgiving week, the beginning of the Holiday Market when the inventory really started to drop. That only left about six-weeks for it to descend, paving the way for a higher start to 2019.

Another crack in the market emerged in May, when the active inventory was higher than the previous year for the first time in 20-months. For nearly two years, the active inventory was less than the prior year. That changed in 2018 and is a trend that will continue for quite some time. By the end of the year, there were 2,353 more homes on the market compared to the end of 2017, 64% more.

For the first few months of the year, sellers were able to stretch their asking prices and achieve success. However, as more homes entered the fray, they began to sit. With rising interest rates, buyers were not willing to pay much more than the Fair Market Value for a home. It was all about the price of a home. Sellers who were a bit too overzealous and pumped up their prices ultimately sat on the market until they adjusted more in line with their true Fair Market Value.

The inventory more than doubled from January to mid-October, rising by 114%. With a late peak, the inventory dropped by only 20% by the end of 2018. In the past two weeks, the inventory has shed 9%, 566 homes, and now totals 5,829, the highest level for an end to a year since 2011, seven years ago. That will translate to an elevated supply of homes to start 2019. The overall temperature of the housing market has everything to do with supply and demand. More homes will pave the way for a slower housing market.

Demand: With rising interest rates, demand was muted all year.

Demand for Orange County homes (the number of pending sales over the prior month) followed a normal strong housing pattern; yet, was muted all year long. In terms of demand, the Spring Market was the hottest, followed by the Summer Market, then the Autumn Market, and, finally, the Holiday Market.

Ever since the housing market revved its massive engine back in 2012, the beginning of the housing run, the storyline was that there were not enough homes with FOR SALE signs in their yards. There was a supply problem. That was even true at the beginning of 2018. By the Spring Market, though, it was quite apparent that the supply problem morphed into a demand problem. After ringing in a New Year, demand was off by 7% compared to the prior year. That difference grew as the year unfolded. In April, demand was off by 12%. In July, it was off by 17%. And, in November, it was off by 23%.

Interest rates started the year at 3.95%. By March, they had risen to 4.5%. They peaked at 5% in November, but dropped at the end of the year retreating to 4.65%. Nonetheless, 4.65% is still a lot higher than the 3.99% average for 2017. Also, home values have risen 76% since bottoming in March 2011. Rising interest rates coupled with higher home values created a home affordability issue. According to the California Association of REALTORS®, only 20% of the Orange County population could afford the median sales price for a home. The median sales price surpassed record levels, reaching a record height of $740,000 in May, up 6.5% from May 2017. Before the Great Recession, the highest median ever was $645,000 achieved in June 2007. The 2018 height was 15% higher.

The bottom line: values had risen dramatically since 2012, substantially outstripping the rise in incomes. As a result, payments had risen too much, too fast. Fewer potential buyers were willing to pull the trigger as payments rose to unsustainable levels.

Within the past two weeks, demand dropped by 205 pending sales, or 14%, and now sits at 1,303 pending sales, the lowest reading since January 2008. Last year at this time, demand was at 1,605, or 27% more than today.

Luxury End: Luxury homes dramatically slowed in the second half of 2018.

2017 was a record-setting year for the most sales ever above $1.25 million. There were 30% more than 2016 and that year was a record-setting year as well. In 2018, Orange County set yet another record, up 1% over 2017. There were 3,945 closed luxury sales compared to 3,897 in 2017. Yet, a major crack emerged as the luxury market slowed considerably in the second half of the year.

The Orange County luxury home market started off robust. In the first half of 2018, there were 10% more luxury sales year over year. But, demand started to drop during the Spring Market. That translated into a slower third quarter with 1% fewer closings year over year. The brakes were pumped a bit more over the summer with even less demand, which resulted in 12% fewer year over year sales in the fourth quarter.

The luxury market was stronger than ever at the beginning of the year; yet, it too succumbed to the same shifts in the housing market as in the lower price ranges. The luxury inventory continued to grow as demand dropped. The inventory peaked for high-end homes in mid-October at 2,163 homes, 19% higher than in 2017. Demand at that time was at 258 pending sales, 15% fewer than 2017. With more supply and muted demand, the market felt a lot more sluggish in the second half of the year. There simply were not enough buyers actively looking to buy. On the other hand, there were plenty of sellers competing with each other, the higher the price, the slower the market.

In the past two weeks, demand for homes above $1.25 million decreased from 186 to 176 pending sales, down 5%. The luxury home inventory decreased from 1,932 homes to 1,796, a 7% drop in the past two-weeks.

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Brian Bogs