Orange County Housing Report:

Housing Insanity: When Will It End?

November 1, 2021

The residential resale housing market has been at an unrelenting, torrid, insane pace since July of last year, and, seemingly, nothing will slow it down.

Interest Rates Juicing the Market

Historically low rates have led to the Expected Market Time dropping to 23 days, the lowest level for this time of year since tracking began in 2004.

For Los Angeles Angels fans, prior to 2002, it seemed that their team would never make the World Series. The Major League Baseball franchise was founded in 1961, and it took them 41 years until they reached the pinnacle games. They had only earned 3 trips to the playoffs prior. As a fan, there were more losing games than winning games, so any vision of hoisting the World Series Commissioner’s Trophy was more of a daydream. There was no light at the end of the tunnel, until the Angels made the playoffs with a wild card berth in 2002. They became only the second team ever to win their solo World Series appearance.

Similarly, for buyers waiting for the market to slow and turn more favorably towards the home shopper, there seems to be no light at the end of tunnel. Housing has lined up in favor of sellers since 2012. Many thought that the pandemic would slow housing, create a deep recession, and erode home values, giving buyers that much desired edge. Instead, rates plummeted to record lows, demand escalated, the inventory of homes available plummeted to unfathomable depths, and home values soared to unbelievable heights. The pandemic led economic recession lasted only two months, and it did not touch the housing industry.

Values have climbed more than 20% year-over-year and the pace of Orange County housing has not slowed much at all this year. The Expected Market Time (the amount of time between hammering in the FOR-SALE sign and opening escrow) is currently at 23 days, an unbelievably Hot Seller’s Market. A Hot Seller’s Market is defined as a market time below 60-days, the lower the level, the hotter the market. At 23-days, the market remains insane with plenty of showings, multiple offers, and sales prices above their list prices. At this point, what will decelerate the market enough to allow housing to transition away from a Hot Seller’s Market to a Slight Seller’s Market, Balanced Market, or even a Buyer’s Market? Rising mortgage rates. That is precisely what occurred in 2013 and 2018.

Like today, in 2013 there was a very limited supply of available homes to purchase, a supply crisis with less than 4,000 homes available. Market time was at a very low, insane level, below 40-days to start the year. The inventory remained at a low level until it started to climb in April. It continued to climb until reaching a late peak in October at 6,350 homes, doubling from the low 3,183 level in March. What changed? Mortgage rates. They started 2013 at just over 3.25%, eclipsed 4% in June, and surpassed 4.5% in September. 

When rates rise, many buyers turn their collective noses away from pursuing a home because monthly mortgage payments rise, and affordability diminishes. As a result, the inventory rises with fewer buyers in the marketplace, and the Expected Market Time rises as well. It takes longer to sell with increased seller competition. In 2013, demand dropped by 27% in October after peaking in June, the inventory doubled from its March lows, and the market time increased from 33 days in March to 82 days in October, a Slight Seller’s Market. That is a market with an Expected Market Time between 60 and 90 days, there are fewer showings than a Hot Seller’s Market, far fewer multiple offer situations, sellers still get to call the shots, and home values are not appreciating much at all. It is not a buyer’s market, but a market where buyers are not kicking and clawing their way to home ownership. 

Similarly, in 2018 there was a supply crisis to start the year with less than 4,000 homes available. Yet, this time interest rates rose rapidly from 4% at the start of January to nearly 4.5% by March. It did not stop there either, making its way to almost 5% by November. With rapidly rising rates, demand was muted during the Spring Market, off by 12% compared to the prior 3-year average. Demand dropped by 28% in October from its peak in May, the inventory doubled from the start of the year to its peak in October, and the market time increased from 51 days in February to 110 days in October, a Balanced Market. A Balanced Market has an Expected Market Time between 90 and 120 days, does not favor buyers or sellers, and values do not change much at all.  

This year there really has been no relief in the relentless pace of real estate due to the historically low mortgage rate environment. According to Freddie Mac’s Primary Mortgage Market Survey®, mortgage rates have risen to 3.14% the highest level since March. For proper perspective, after the start of the pandemic, rates reached 17 record lows, the 17^th was during the first week of January of this year at 2.65%. Yes, rates have risen from there, but keep in mind that prior to the pandemic, today’s 3.14% rate would be an all-time low. They remain at very low levels, which is why the active listing inventory is 67% below the 3-year average between 2017 and 2019, prior to the pandemic, demand is 11% higher, and the market time is stuck well below 40-days.

For the market to noticeably slow, mortgage rates would need to rise considerably. At 3.5%, it would afford a little bit of relief, but not much. Rates would need to climb to 4% for the market to slow from an insanely Hot Seller’s Market to just a Hot Seller’s Market with market times closer to 60-days. Very few economists project rates to climb above 4%. That is what it would take for the market to move more towards a Buyer’s Market. The market needs to transition first to a Slight Seller’s Market, between 60 and 90 days, then to a Balanced Market, between 90 and 120 days, next to a Slight Buyer’s Market, between 120 and 150 days, and finally, to a Deep Buyer’s Market, greater than 150 days. A Deep Buyer’s Market is one where there are very few showings, a glut of homes available to purchase, very few offers to purchase, buyers get to call all the shots and take their time, and values tumble. That would take a rise in rates to over 4.5%, which is not anticipated to occur anytime on the horizon.

The light at the end of the tunnel with a shift in the market will not occur until mortgage rates rise substantially. Freddie Mac forecasted a couple of weeks ago that mortgage rates will rise to 3.5% in a year from now. That is not quite enough to slow housing meaningfully. Either rates eventually climb to slow housing, or values will climb to the point that they soften demand. The Orange County housing market is just not there yet. 

Active Listings

The current active inventory plunged by 9% in the past two weeks.

The active listing inventory shed 178 homes in the past couple of weeks, down 9%, and now sits at 1,864 homes, the lowest level since tracking began in 2004. That’s a huge drop and has plunged the inventory to uncharted territories with a record low number of homes to start November. Last year at this time it reached a record low level for a start to November at 3,944 homes, 111% more than today, more than double, or an extra 2,080 homes available to purchase. There are only a few more weeks until housing transitions to the Holiday Market, from the week prior to Thanksgiving through the first couple of weeks of the New Year. Fewer homes will enter the fray and many unsuccessful sellers will throw in the towel. It is hard to believe, but 43% of the inventory has been on the market for over 30-days, the most likely sellers to pull their homes off the market during the holidays and wait until next year to try again. Expect the inventory to continue to drop in the next couple of weeks before plunging to its lowest levels of the year upon celebrating ringing in 2022. 

The 3-year average from 2017 to 2019 (intentionally omitting 2020 due to COVID skewing the data) is 6,010, an extra 4,146 homes, or 222% more, triple compared to today. There were a lot more choices back then. The inventory typically drops 5% at this time of the year, not quite as high at the 9% drop realized in the past couple of weeks.

For September, there were 295 fewer new FOR-SALE signs in Orange County compared to the 3-year average from 2017 to 2019, 10% less. Every single missing sign just adds to the inventory crisis.

Demand

Demand dropped by 3% in the past couple of weeks.

Demand, a snapshot of the number of new escrows over the prior month, decreased from 2,515 to 2,429 in the past couple of weeks, shedding 86 pending sales, down 3%. Demand typically drops about 1% during this time of the year, but the inventory crisis is so acute that it is now limiting the number of pending sales in Orange County. Yet, even with fewer homes on the market than ever before, and fewer homes coming on the market compared to prior pandemic averages, demand is still 10% stronger than the 3-year average from 2017 to 2019, an extra 248 pending sales. The low mortgage rate environment is continuing to juice demand. Expect demand to continue to drop from now through mid-November, the week prior to Thanksgiving. The second fewest number of homes come on the market in November, and the smallest number of homes to hit the market occurs in December. From mid-November until New Year’s Eve, demand will plunge to its lowest levels of the year. From there, it will rise again in January.

Last year, demand was at 3,019, 24% more than today due to a four-month delay in the Spring Market because of COVID.

With a significant drop in the supply and smaller drop in demand, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) dropped from 24 to 23 days, an extremely insane, Hot Seller’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. The lowest level of the year occurred on April 1^st, not much different than today. Last year the Expected Market Time was at 39 days. The 3-year average from 2017 through 2019 was at 85 days, much slower than today, but still a Slight Seller’s Market.

Luxury End

The luxury market slowed did not change much in the past couple of weeks. 

In the past two weeks the luxury inventory of homes priced above $1.5 million decreased by 29 homes, down 4%, and now sits at 672, the lowest level since tracking began. Luxury demand decreased by 13 pending sales, down 3%, and now sits at 409, its lowest level since February. With a similar drop in both supply and demand, the overall Expected Market Time for luxury homes priced above $1.5 million remained unchanged at 51 days, still a very Hot Seller’s Market for luxury.

Year over year, luxury demand is up by 58 pending sales or 17%, and the active luxury listing inventory is down by 564 homes or 46%. The Expected Market Time last year was at 110 days, extremely hot for luxury, but double where it is right now, indicating just how hot the luxury market is today. 

For homes priced between $1.5 million and $2 million, the Expected Market dropped from 29 to 24 days. For homes priced between $2 million and $4 million, the Expected Market Time increased from 49 to 54 days. For homes priced above $4 million, the Expected Market Time decreased from 129 to 126 days. At 126 days, a seller would be looking at placing their home into escrow around March 2022.

 Orange County Housing Summary 

• The active listing inventory shed 178 homes in the past two weeks, down 9%, and now totals 1,864 homes, its lowest level since tracking. In September, there were 10% fewer homes that came on the market compared to the 3-year average between 2017 to 2019 (2020 was skewed due to COVID-19), 295 less. Last year, there were 3,944 homes on the market, 2,080 additional homes, or 111% more.
• Demand, the number of pending sales over the prior month, decreased by 86 pending sales in the past two weeks, down 3%, and now totals 2,429. Last year, there were 3,019 pending sales, 24% more than today due to a four-month delay in the Spring Market because of COVID. 
• With a significant drop in the supply and smaller drop in demand, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, decreased from 24 to 23 days in the past couple of weeks, an extremely Hot Seller’s Market (less than 60 days). It was at 39 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 18 days. This range represents 28% of the active inventory and 35% of demand. 
• For homes priced between $750,000 and $1 million, the Expected Market Time is 17 days, a Hot Seller’s Market. This range represents 20% of the active inventory and 27% of demand.
• For homes priced between $1 million to $1.25 million, the Expected Market Time is 17 days, a Hot Seller’s Market. This range represents 9% of the active inventory and 12% of demand.
• For homes priced between $1.25 million to $1.5 million, the Expected Market Time is 19 days, a Hot Seller’s Market. This range represents 8% of the active inventory and 10% of demand.
• For homes priced between $1.5 million and $2 million, the Expected Market dropped from 29 to 24 days. For homes priced between $2 million and $4 million, the Expected Market Time increased from 49 to 54 days. For homes priced above $4 million, the Expected Market Time decreased from 129 to 126 days.
• The luxury end, all homes above $1.5 million, accounts for 36% of the inventory and 16% of demand.
• Distressed homes, both short sales and foreclosures combined, made up only 0.5% of all listings and 0.32 of demand. There are only 8 foreclosures and 1 short sale available to purchase today in all of Orange County, 9 total distressed homes on the active market, down 2 from two weeks ago. Last year there were 14 total distressed homes on the market, similar to today.

• There were 2,981 closed residential resales in September, 11% less than August 2020’s 3,336 closed sales. September marked a 4% drop compared to August 2021. The sales to list price ratio was 100.8% for all of Orange County. Foreclosures accounted for just 0.1% of all closed sales, and short sales accounted for 0.1%. That means that 99.8% of all sales were good ol’ fashioned sellers with equity.