Rising Rates Vs. No Inventory

February, 2022

There are two opposing economic forces impacting the housing market right now, rising mortgage rates and a record low supply of homes available to purchase.

Opposing Forces

There simply are not enough homes available for buyers and rising rates have not yet had an impact on the insanely hot housing market. 

The supply chain problems have been well documented across the United States and around the globe. One of the hardest hit industries is new cars. The supply of available new cars has dwindled down to record lows. As a result, dealers are adding a “market adjustment fee,” a line-item cost above the MSRP. The fee ads anywhere from a few thousand dollars to as much as $20,000 more for a popular model. It has everything to do with supply and demand. Consumers looking for a new car are confronted with very few options and rising car prices. To get their hands on one, many are willing to pay the surcharge.

Housing feels like it too is suffering from the supply chain problem with seemingly nothing available to purchase. Last year the inventory in Orange County started the year at an all-time low with 2,633 available homes. It hit 2,214 on June 10^th, rose and peaked in June, and then continued to plunge until only 954 homes were on the market on January 1^st of this year, just a few weeks ago. Today, there are only 1,080 homes, adding only 126 during the first few weeks of the year. The difference between this year and last year’s record low is striking. There are 1,547 fewer homes today, 59% less. Every price range has been similarly impacted. 

Comparing today to the 3-year average between 2017 to 2019, prior to the pandemic, is mind blowing. There are 3,667 fewer homes available, an impressive 77% less. That means there were over four times as many homes on the market prior to COVID-19. Today, there are far fewer homes in every price range, especially below $750,000. For homes less than $500,000, there are 150 today compared to 817 last year, a remarkable 82% less. Between $500,000 and $750,000 there are 153 homes today compared to 1,147, an unbelievable 87% fewer. 

The inventory was already trending lower prior to the pandemic, but the pandemic accelerated the issue as fewer homes were placed on the market despite soaring demand. In 2020 and 2021 combined, there were 5,142 fewer FOR-SALE signs compared to the average number between 2017 and 2019, 7% less. 

Since ringing in a New Year, mortgage rates have been steadily climbing, eroding home affordability. According to Freddie Mac’s Primary Mortgage Market Survey®, rates have risen from 3.05% on December 23^rd to 3.56% as of January 20^th, up a half of a percent in just 4-weeks. It has many speculating that even higher rates are coming. Throw in a volatile stock market, and many are beginning to wonder if these changes are just the beginning of the end to the pandemic run on the housing market. 

First, it is best to explain why mortgage rates have been moving higher. Investors and Wall Street had already digested the fact that the Federal Reserve was tapering their purchases of Mortgage-Backed Securities and were going to be raising the Short-Term Federal Funds Rate (tied to automobile loans and credit card debt and NOT to 30-year mortgages) starting this March. Additionally, they just announced that they were going to be draining their balance sheets. That was unexpected. The Federal Reserve went from calling inflation transitory, or temporary, and doing nothing just a few months ago, to acknowledging that it was an issue and that they were going to do everything in their power to slow inflation’s grip on the economy. It was as if the Fed acknowledged that they made a mistake and that they were behind the 8-ball, and now they are engaging in a “hurry up offense” style to try and make up for lost time. The markets reacted and rates rose by a half a percent in 4-weeks. 

There is an impact to rising rates. The rise from 3.05% to 3.56% is an additional $252 per month for a $900,000 mortgage, or $3,027 per year. However, with such a limited supply of available homes the impact is not being felt on the street. Today’s rate may be the highest since the start of the pandemic, but it is still a really great rate. The extra $252 per month is more of a “market adjustment fee” for housing that is easily absorbed due to the extremely limited number of homes available. Homes are still flying off the market as fast as they are coming on. Throngs of buyers are waiting in lines for the opportunity to see a home that is placed on the market. Multiple offers are the norm. After receiving 10, 20, or 30 offers on a home, the sellers are calling all the shots, sales prices exceed their asking prices, and home values continue to rapidly rise. 

Why has the rise in rates not yet affected the housing market? The answer is simple: rates have not climbed high enough to materially slow demand. Mortgage rates climbed considerably in both 2013 and 2018, which caused a shift in the market. Demand cooled, the inventory increased, market times grew, and the market slowed from a Hot Seller’s Market to a much more balanced market. In 2013, rates rose from 3.34% to 4.57%, and in 2018 they rose from 3.99% to 4.94%. The recent runup in rates is much smaller. If they continue to climb, then the market could cool. But, for now, Wall Street and investors have digested future Federal Reserve moves and they most likely will not rise much more from here. Rates would need to climb to 4% or higher to slow housing. At 4%, the difference in payment for that same $900,000 mortgage example would be $478 more per month, or $5,739 per year. At 4.25%, it would be $608 per month, or $7,299 per year.

The recent four week rise in mortgage rates had no real impact on the current pace of housing. It will be important to watch how mortgage rates unfold in the weeks and months to come. Until rates rise substantially from here, it is business as usual, an insanely hot housing market in Orange County. 

Active Listings

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

The active listing inventory decreased by 20 homes in the past couple of weeks, down 2%, and now sits at 1,080 homes. It is the Winter Market. There just are not enough homes that come on the market during the winter months until the housing hits the second half of March. This is coming on the heels of the slowest housing patch of the year, October through December in terms of the number of homes placed on the market. With today’s heightened demand, homes are placed into escrow as fast as they are coming on the market, like a revolving door. It is just too difficult for the inventory to rise much until spring, so expect it to remain flat or even drop for the next several weeks. The only caveat to this is rising rates. If rates rise another half a point and breach 4%, then the inventory will rise sooner. 

Last year, the inventory was at 2,627, 143% more, or an additional 1,547 homes. The 3-year average prior to COVID (2017 through 2019) is 4,739, an extra 3,659 homes, or 339% more, quadruple compared to today. There were a lot more choices back then.

For December, there were 1,468 new FOR-SALE signs in Orange County, only 26 fewer than the 3-year average from 2017 to 2019, 2% less. Every single missing sign magnifies the inventory crisis.

Demand

Demand surged by 10% in the past couple of weeks.

Demand, a snapshot of the number of new escrows over the prior month, increased from 1,295 to 1,426 in the past couple of weeks, adding 131 pending sales, up 10%. With such a limited number of homes available, just about everything that comes to market is being thrown into escrow. Homes start coming on the market at a faster pace as the month of January progresses, gaining steam throughout the month of February as well. Expect demand readings to surge over the next four weeks. With surging demand and a flat inventory, the market will only grow hotter. Market times typically drop to its lowest point of the year sometime in March.  Even with rates rising in the past four weeks, it has not dampened demand at all. It would take a much higher climb for the impact to be felt within the real estate trenches. 

Last year, demand was at 2,055, 44% more than today. Year over year comparisons will be off through February due to market changes because of COVID. A much better comparison is looking at the 3-year average prior to COVID (2017 to 2019), which was 1,710 pending sales, 20% more than today. In Orange County, current demand readings have obviously been muted by a lack of available homes and not enough coming on the market.

With surging demand and a small drop in the inventory, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) decreased from 25 to 23 days, its lowest level for this time of the year by far. At 23 days, it is an insane, HotSeller’s Market (less than 60 days) where there are a ton of showings, sellers get to call the shots during the negotiating process, multiple offers are the norm, and home values are rising rapidly. Last year the Expected Market Time was at 38 days, slower than today. The 3-year average prior to COVID was at 86 days, substantially slower than today and a Slight Seller’s Market (between 60 and 90 days). 

Luxury End

Luxury demand soared in the past couple of weeks. 

The recent volatility on Wall Street has not impacted luxury in Orange County. In fact, luxury demand of homes priced above $2 million in the past couple of weeks increased by 74 pending sales, up 64%, and now sits at 190. The luxury inventory of homes priced above $2 million decreased by 16 homes, down 5%, and now sits at 336. With demand surging and the luxury inventory dropping, the overall Expected Market Time for luxury homes priced above $2 million decreased from 91 to 53 days, an extremely hot market for luxury.

Year over year, luxury demand is down by 8 pending sales or 4%, and the active luxury listing inventory is down by 397 homes or 54%. The Expected Market Time last year was at 111 days, exceptionally hot for luxury, but more than double where it stands today, indicating just how unbelievably hot the luxury market is right now. 

For homes priced between $2 million and $4 million, the Expected Market decreased from 55 to 34 days. For homes priced between $4 million and $8 million, the Expected Market Time decreased from 159 to 74 days. For homes priced above $8 million, the Expected Market Time decreased from 210 to 172 days. At 172 days, a seller would be looking at placing their home into escrow around July 2022.

Orange County Housing Summary

• The active listing inventory shed 20 homes, down 2%, and now totals 1,080 homes, its lowest level for this time of the year since tracking began 18 years ago. In December, there were 2% fewer homes that came on the market compared to the 3-year average prior to COVID (2017 to 2019), 26 fewer. Last year, there were 2,627 homes on the market, 1,547 additional homes, or 143% more.
• Demand, the number of pending sales over the prior month, surged by 131 pending sales in the past two weeks, up 10%, and now totals 1,426. Last year, there were 2,055 pending sales, 44% more than today due to the impact of COVID on housing. 
• With demand surging and supply slightly dropping, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, decreased from 25 to 23 days in the past couple of weeks, an insanely Hot Seller’s Market (less than 60 days). It was at 38 days last year, slower 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 19 days. This range represents 28% of the active inventory and 33% of demand. 
• For homes priced between $750,000 and $1 million, the Expected Market Time is 16 days, a Hot Seller’s Market. This range represents 18% of the active inventory and 26% of demand.
• For homes priced between $1 million to $1.25 million, the Expected Market Time is 14 days, a Hot Seller’s Market. This range represents 7% of the active inventory and 12% of demand.
• For homes priced between $1.25 million to $1.5 million, the Expected Market Time is 20 days, a Hot Seller’s Market. This range represents 8% of the active inventory and 8% of demand.
• For homes priced between $1.5 million to $2 million, the Expected Market Time is 25 days, a Hot Seller’s Market. This range represents 8% of the active inventory and 8% of demand.
• For homes priced between $2 million and $4 million, the Expected Market decreased from 55 to 34 days. For homes priced between $4 million and $8 million, the Expected Market Time decreased from 159 to 74 days. For homes priced above $8 million, the Expected Market Time decreased from 210 to 172 days.
• The luxury end, all homes above $2 million, accounts for 31% of the inventory and 14% of demand.
• Distressed homes, both short sales and foreclosures combined, made up only 0.2% of all listings and 0.6% of demand. There is only 1 foreclosure and 1 short sale available to purchase today in all of Orange County, 2 total distressed homes on the active market, down 1 from two weeks ago. Last year there were 8 total distressed homes on the market, similar to today.

• There were 2,486 closed residential resales in December, 20% less than December 2020’s 3,091 closed sales. For the year, through December, there have been 35,180 closed sales, 16% higher than 2020 and the most sales since 2005. December marked a 3% drop compared to November 2021. The sales to list price ratio was 101.1% for all of Orange County. Foreclosures accounted for just 0.2% of all closed sales, and there were no closed short sales. That means that 99.8% of all sales were good ol’ fashioned sellers with equity.

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