September End Market Update

Orange County Housing Report:

Hunkering Down

Significantly higher mortgage rates are preventing a massive number of homeowners from selling their homes, and the trend has only grown more problematic recently.

In August there were 30% fewer FOR-SALE signs than the average prior to COVID, more than 1,000 missing sellers.

On March 19, 2020, the Governor of California issued a “stay at home” order. Offices, small businesses, shop owners, and schools all closed their doors and headed home. Only essential workers, such as health care, emergency services, and food services, were able to leave their houses and head to work. Once congested freeways were empty. Outings were limited to a once per week trip to the local grocery store. As a result of the pandemic and the need to hunker down, in Orange County there were 49% fewer new FOR-SALES in April 2020 compared to the 3-year average prior to COVID (2017 to 2019), an astonishing 1,974 missing signs.

Eventually more homeowners placed their homes on the market. In fact, there were more homeowners who came on the market from July to December 2020 than the 3-year average. Seven of the twelve months were positive. Overall, in 2020, there were 6% fewer homeowners who came on the market for the year, 1,795 less. 

Even after learning to continue to live life and go back to work amidst a pandemic, there still were more homeowners who hunkered down and refused to move. In 2021, there were 6% fewer FOR-SALE signs than the 3-year average, 2,311 less. Eleven out of the twelve months were negative compared to the average. 

A lack of sellers due to the pandemic is understandable for 2020 and 2021. With vaccines and boosters, 90% of Americans today see COVID as a manageable problem (Axios-Ipsos, September 2022). Yet, far fewer homeowners are placing their homes on the market in 2022. This trend has persisted and became more severe over the past couple of months. Through August, there are 5,473 missing sellers in Orange County compared to the 3-year average prior to COVID, 19% less. 

In July, there were 2,931 new sellers compared to the 3,707 average, 776 fewer, or 21% less. Then in August there were only 2,484 new sellers compared to the 3,573 average, 1,054 fewer, or 30% less. The number of homes coming on the market has been muted all year long. Only the first few months of the pandemic fared worse. 

What is precluding so many homeowners from selling their homes this year? The only major changing underlying factor is the swift rise in mortgage rates. According to Mortgage News Daily, mortgage rates rocketed higher, from 3.25% at the start of this year to over 4% by the end of February. They climbed to 4.75% at the end of March, over 5% in April, and reached 5.5% at the start of May. With a high inflation reading in mid-June, rates soared to 6.25%. They bounced between 5% and 6% in July and August. In September, with another high inflation reading and the Federal Reserve exclaiming that they were going to do everything in their power to slow the economy and curb inflation, mortgage rates shot up to 6.42% today, its highest level since November 2008. 

So many homeowners are not moving because they simply do not want to sell, as they are locked into an incredibly low fixed mortgage rate. According to Black Knight, 72% of all homeowners with a mortgage have a 30-year fixed mortgage rate at 4% or lower, 55% have a rate at 3.5% or lower, and 34% have a rate at 3% or lower. Comparing the monthly payment at today’s 6.42% rate to homeowners with substantially less locked in monthly payments is very revealing. An $800,000 mortgage today at 6.42% would be a principal and interest payment of $5,015 per month, compared to $3,819 at 4%, or $3,592 at 3.5%, or $3,373 at 3%. 

If a homeowner sells and opts to purchase a replacement property, they are going to be paying a much higher rate and, most likely, much higher property taxes. Thus, they are staying put. There are homeowners who would like to move for a variety of reasons but are hunkering down because they are enjoying a low fixed monthly payment. There are owners who would like to downsize, have a private pool and spa, prefer a larger yard, or need more bedrooms because of a growing family, but are holding off, for now. Quite simply, they love their loan. They love their low payment. 

The trend of fewer sellers coming to market has prevented the active inventory from growing and reaching pre-pandemic levels. The inventory had grown from a record low of 954 homes to start the year to 4,069 homes until reaching a peak at the start of August, a 327% rise, but still far from inventory levels prior to COVID. The 3-year average prior to COVID was 6,520 homes, 79% higher, or an additional 2,882 compared to today’s 3,638 level. If the typical number of homeowners would have come on the market this year, more sellers would have accumulated on the market and the increased competition would have led to a larger erosion of home values. It is yet another twist in this wild post-pandemic housing market.

“Hunkering down," an unexpected trend that emerged this year and appears to be here to stay until there is forced selling down the road or mortgage rates fall back down to earth. 

Active Listings

The current active inventory dropped by 2% in the past couple of weeks.

The active listing inventory decreased by 88 homes, down 2%, and now sits at 3,638, continuing its drop since peaking at the start of August. After 30-year mortgage rates dropped to 5% last month, they have climbed from 6% to 6.42% so far in September. These higher rates are further deteriorating home affordability, resulting in another drop in demand. Less demand has kept the inventory from dropping further, even with fewer homeowners opting to sell. From here, expect the inventory to continue to slowly drop as fewer homeowners come to market during the Autumn Market. The inventory will plunge to finish the year between Thanksgiving and New Year’s Day. 

Last year, the inventory was at 2,289, 37% lower, or 1,349 fewer. The 3-year average prior to COVID (2017 to 2019) is 6,520, an extra 2,882 homes, or 79% more. There were a lot more choices back then.

Demand

Demand decreased by 4% in the past couple of weeks.

Demand, a snapshot of the number of new escrows over the prior month, decreased from 1,831 to 1,756 in the past couple of weeks, shedding 75 pending sales, or down 4%. It was the largest drop since the start of July. The high mortgage rate environment has dramatically impacted demand, dropping to levels not seen since the Great Recession. There are always buyers in every market, referred to as inherent demand, but expect demand levels to remain severely subdued. Mortgage rates are projected to remain above 6% for the remainder of the year. Demand will slowly drop from now until Thanksgiving. It will then plunge during the Holiday Market until ringing in a New Year. 

Last year, demand was at 2,623, 49% more than today, or an extra 867. The 3-year average prior to COVID (2017 to 2019) was at 2,363 pending sales, 35% more than today, or an extra 607.

With demand dropping faster than supply, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) increased from 61 to 62 days in the past couple of weeks, the lowest level since the end of June. At 62 days, it remains a Slight Seller’s Market (60 to 90 days) where sellers get to call more of the shots, there are far fewer multiple offers and home values are not appreciating much at all. The market is no longer instant and properly pricing is crucial to find success, carefully considering location, condition, upgrades, and amenities. Last year the Expected Market Time was at 26 days, substantially faster than today. The 3-year average prior to COVID was at 84 days, also a Slight Seller’s Market and slower than today.

Luxury End

The luxury housing market cooled considerably in the past couple of weeks. 

In the past couple of weeks, the luxury inventory of homes priced above $2 million increased from 785 to 804 homes, up 19 homes, or 2%. Luxury demand decreased by 32 pending sales, down 16%, and now sits at 168, its lowest level since January. With supply rising and demand dropping, the overall Expected Market Time for luxury homes priced above $2 million increased from 118 to 144 days, its highest reading since January 2021. With the instability of Wall Street and stubbornly high rates, it appears as if the luxury market will continue to slow. 

Year over year, luxury demand is down by 76 pending sales or 31%, and the active luxury listing inventory is up by 233 homes or 41%. The Expected Market Time last year was at 70 days and dropping, much stronger than today. 

For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks increased from 91 to 113 days. For homes priced between $4 million and $8 million, the Expected Market Time increased from 161 to 220 days. For homes priced above $8 million, the Expected Market Time decreased from 407 to 325 days. At 325 days, a seller would be looking at placing their home into escrow around August 2023.

Orange County Housing Summary

• The active listing inventory in the past couple of weeks decreased by 304 homes, down 2%, and now sits at 3,638, its lowest level since June. In August, there were 30% fewer homes that came on the market compared to the 3-year average prior to COVID (2017 to 2019), 1,054 less. Last year, there were 2,289 homes on the market, 1,349 fewer homes, or 37% less. The 3-year average prior to COVID (2017 to 2019) was 6,520, or 79% more.
• Demand, the number of pending sales over the prior month, decreased by 75 pending sales in the past two weeks, down 4%, and now totals 1,756. It is still the lowest reading for mid- September since 2007. Last year, there were 2,623 pending sales, 49% more than today. The 3-year average prior to COVID (2017 to 2019) was 2,363, or 35% more. 
• With demand dropping faster than the supply of homes, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, increased from 61 to 62 days in the past couple of weeks, a Slight Seller’s Market (between 60 and 90 days). It was at 26 days last year, much stronger than today.  
• For homes priced below $750,000, the market is a Hot Seller’s Market (less than 60 days) with an Expected Market Time of 43 days. This range represents 20% of the active inventory and 29% of demand. 
• For homes priced between $750,000 and $1 million, the Expected Market Time is 51 days, a Hot Seller’s Market. This range represents 24% of the active inventory and 29% of demand.
• For homes priced between $1 million to $1.25 million, the Expected Market Time is 54 days, a Hot Seller’s Market. This range represents 12% of the active inventory and 13% of demand.
• For homes priced between $1.25 million to $1.5 million, the Expected Market Time is 62 days, a Slight Seller’s Market. This range represents 11% of the active inventory and 11% of demand.
• For homes priced between $1.5 million to $2 million, the Expected Market Time is 85 days, a Slight Seller’s Market. This range represents 12% of the active inventory and 9% of demand.
• For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks increased from 91 to 113 days. For homes priced between $4 million and $8 million, the Expected Market Time increased from 161 to 220 days. For homes priced above $8 million, the Expected Market Time decreased from 407 to 325 days.
• The luxury end, all homes above $2 million, accounts for 22% of the inventory and 9% of demand.
• Distressed homes, both short sales and foreclosures combined, made up only 0.2% of all listings and 0.1% of demand. There are only 5 foreclosures and 3 short sales available to purchase today in all of Orange County, 8 total distressed home on the active market, unchanged from two weeks ago. Last year there were 13 total distressed homes on the market, similar to today.

• There were 2,168 closed residential resales in August, 30% less than August 2021’s 3,119 closed sales. August marked an 11% increase compared to July 2022. The sales to list price ratio was 99.0% for all of Orange County. Foreclosures accounted for 0.1% of all closed sales, and there were no short sales. That means that 99.9% of all sales were good ol’ fashioned sellers with equity.