It is time to get realistic for buyers looking to purchase a home in OC below $750,000.02/04/2012 – Source: Steven Thomas – Quantitative Economics and Decision Sciences
I talk to REALTORS® out in the trenches and they all say that most buyers that are new to the market are unrealistic in their expectations. Flip on the news, open up the papers, talk to a neighbor and one would believe that the market is flooded with foreclosures and that prices are falling like a rock. The expectation is that there are plenty of homes on the market and that there is little competition to purchase. They assume that they can get a “deal” and will be able to get a 10 to 20% discount off of the asking price. It is time to tackle these myths one at a time. First off, the market is NOT flooded with foreclosures. Instead, there are currently less than 550 foreclosures on the active listing inventory and they fly off the market. That’s only 7% of the total active inventory. Almost every buyer would like to buy a foreclosure but there simply are not enough of them to go around. Thus, the expected market time had dropped to a little over one month, an extreme sellers market. For all closed sales over the past year, the average reduction off of the asking price is only 3%. 3% is not 5% and it is not 10% and it is definitely not 15 or 20%. 3% is 3%. That means that for a home priced at $500,000, the average reduction is only $15,000. Writing an offer with a $50,000 discount will result in nothing more than a waste of everybody’s time. Instead, buyers should approach the market with the knowledge that the inventory is low and that there will be a lot of competition within the marketplace. Rather than approaching with the anticipation of getting a certain set discount on the purchase of a home, be prepared to carefully scrutinize the most recent comparable sales and pending sales data. Buyers rightfully don’t want to overpay for a home, but they should sharpen their pencils and submit offers to purchase at or very close to the fair market value of a home. Having the proper mindset is the difference between success and coming up empty handed and frustrated.
Demand: Orange County housing demand is taking off.
Typically Super Bowl Sunday marks the beginning of the Spring Market. I would argue that the housing market is experiencing an early spring that started in mid-January. Could it be the warm weather that is stimulating demand? Record low interest rates? Experts declaring that a bottom has been reached? It’s probably a case of “all of the above,” plus a bit of optimism going into a New Year. Regardless, the housing market has absolutely surged and it is not due to a first time home buyer tax credit or other government program. Sure the Federal Reserve has kept rates at historically low levels, but buyers have proven that they are not motivated by interest rates; motivation is more about the belief that it is the right time to purchase. That belief is starting to break through in today’s housing market. Affordability is currently at a point not seen in well over a decade. Payments for the median sales price home have not been this low since 1999. There are many instances throughout Orange County where even after factoring the mortgage payment, taxes, insurance, and homeowner association dues, the total real payment, it is still cheaper than renting within the same neighborhood. Overall, demand, the number of new pending sales over the prior month, is up 13% compared to 2011, and now totals 3,134 pending sales. In the past two weeks alone, demand increased by 24%. For homes priced below $500,000, demand is up 26% compared to last year and the expected market time is a sizzling 1.9 months. For homes priced above $500,000, demand is actually less than one year ago; however, that is mostly due to a much smaller inventory compared to last year. In looking at the expected market time for various ranges, with the exception of homes priced between $1.5 million and $4 million, the market is stronger today compared to last year.
The Active Listing Inventory: The listing inventory took another unprecedented drop.
This is the second report in a row where the active listing inventory dropped. That wipes away any speculation that we had just experienced a periodic data anomaly. Instead, this is proving to be a trend. The current active listing inventory shed 257 homes in the past two weeks and now totals 7,823. You have to wind the clock all the way back to January 2010 to find the last time the inventory was this low. Back then the inventory was climbing. Last year the listing inventory was at 10,389, that’s an additional 2,566 homes on the market. Today, with fewer homes on the market, demand has soared. It’s basic Econ 101: when supply drops, demand increases. The inventory is dropping because homes are flying off the market at a faster pace than they are coming on. I am still concerned that eventually word of the incredibly hot activity, multiple offers and sales prices at or close to their asking prices will spread like a wild fire and motivate many homeowners to cash in on a “better market.” Sellers can be just as unrealistic as buyers. Many assume that all of this activity translates to appreciation, or the ability to procure a buyer willing to pay extra for their home.
Here’s another REALITY CHECK: buyers are not willing to pay a premium for a home yet. There are still a lot of distressed homes on the market, which ultimately keeps a lid on any real appreciation. So, if you are a seller, I beg of you, please do not place your home on the market at an unrealistic value higher than the true market value. If you choose to ignore my advice, be prepared to sit on the market for months, a futile waiting game for a buyer willing to overpay simply because there is a lot of activity. If the market becomes flooded with these unrealistic, overpriced sellers, the active listing inventory will balloon and demand will drop, simple Econ 101.
The Distressed Market: The distressed inventory hasn’t been this low since February 2010.
In Orange County, the active distressed inventory, both short sales and foreclosures combined, dropped by an unbelievable 299 homes and now totals 2,691. That’s the largest drop since March of last year. Last year at this time, the distressed inventory was at 4,104 foreclosures and short sales, 1,413 more than today. Currently, the distressed inventory represents 34% of the active inventory. In the past two weeks, the foreclosure inventory dropped by 24 homes and now totals 546. You have to go all the way back to June 2010 to find fewer foreclosures on the market. Foreclosures will be a very hot commodity throughout 2012. The expected market time is an unbelievable 1.1 months, a deep sellers market. The short sale inventory decreased by 245 homes in the past two weeks and now totals 2,175. That’s the lowest since December 2009. The expected market time dropped to 1.6 months, also a deep sellers market. The big difference between foreclosures and short sales is that the closing date for short sales cannot really be predetermined. There are great deals in the short sale arena, but it comes at the expense of an unknown closing date. Lender approvals can take anywhere from a month to months. And, some short sales just don’t come together when all parties cannot seem to agree. That’s often the case when there are multiple lenders, unpaid homeowner association dues, unpaid property taxes, tax liens, judgment liens and/or attorneys involved.
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. Read his profile and client reviews at www.ScotCampbell.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