January Housing: A Slight Thaw

It is a Southern California chilly morning. You climb into your car for the daily commute to the office and blast the heater, but it blows cold air because the engine is not hot yet. Your fingers are numb, and you cannot wait for the temperature to start to rise. After a couple of minutes, the blowing air begins to warm. That is precisely how the housing market starts every year. Housing’s engine is cold on the first of January and takes a few weeks to heat up. This year is no exception, the market is finally starting to warm up a bit.

The housing market in 2019 started off a lot colder than everybody had been accustom to. It was the coldest start since 2011 with an Expected Market Time of 152 days, Buyer’s Market territory (the Expected Market Time is the amount of time it would take to place a home on the market today and enter escrow down the road). But, in the past couple of weeks, the market began its annual thaw. 

The active inventory rose by 4% and demand jumped by 23%, as a result, the Expected Market Time dropped from 152 days to 128. At 128 days, it is still a slight Buyer’s Market, just not as frigid as a couple of weeks ago. Last year, during the same time period, the inventory increased by 2% and demand increased by 22%, which resulted in the Expected Market Time dropping from 77 days to 64, a Seller’s Market.

This year’s market is completely different than the past seven years. From 2012 through 2018, housing moved to a Seller’s Market by the end of January. In most cases, it quickly moved to a HOT Seller’s Market with Expected Market Times below 60-days. That will not be the case for 2019. Instead, the market is moving towards a Balanced Market, one that does not favor buyers or sellers. 

The best time to sell a home, with the lowest Expected Market Time readings for the year, occurs from the Super Bowl through mid-May. This year will be no exception; it just will not be as robust as the past seven years. Many homeowners and sellers are holding their collective breath with high expectations for the Spring Market. Remember, right now it is still a slight Buyer’s Market. It will drop down to a Balanced Market, NOT a Seller’s Market. It will remain balanced until mid-May. That is when demand will remain relatively the same while more homes come on the market. As a result, the Expected Market Time will rise from mid-May through the Summer Market. 

Why will Orange County housing not be hotter in the spring? The answer is a simple Econ 101 principle, supply and demand. The supply of homes, the active listing inventory, is up 62% over last year. Demand, the last 30-days of pending sales, is down 19% from last year. With more sellers competing against each other, coupled with muted demand, the market feels a bit more sluggish than what everybody has been accustom to. 

The bottom line: expect housing to be different this year, plan and adjust accordingly.

ACTIVE INVENTORY

In the past couple of weeks, the active inventory increased by 211 homes, a 4% rise, and now totals 6,122. Last year, the inventory did not eclipse the 6,000-home mark until mid-June. From here, expect the inventory to continue to rise until peaking sometime over the summer. More and more homeowners opt to place their homes on the market from now through both the Spring and Summer Markets. The greatest number of homes come on in May. 

Last year at this time there were 3,774 homes on the market. That means that there are 62% more homes available today. This is the highest level of homes on the market in January since 2012.

DEMAND

Demand, the number of new pending sales over the prior month, soared in the past couple of weeks, rising from 1,190 to 1,435, an increase of 270 pending sales, or 23%. This is typically when the housing market revs its massive engine and rapidly climbs through mid-February. It will continue to rise until peaking sometime in May. 

Even with the increase in demand, it is the lowest reading for this time of the year since 2008. It will continue to be muted compared to recent years and the demand readings will be comparable to 2007 levels throughout the year.

Last year at this time, there were 329 additional pending sales, 23% more.

The current Expected Market Time dropped from 152 days to 128 days in the past two weeks, a slight Buyer’s Market (between 120 and 150 days). As the market continues to awaken, the market will move to a Balanced Market (between 90 and 120 days). Last year, the Expected Market Time was at 64 days, knocking on the door of a HOT Seller’s Market. 

LUXURY END

In the past two-weeks, demand for homes above $1.25 million increased by 40 pending sales, a 27% increase, and now totals 187. The luxury home inventory increased by 44 homes and now totals 1,870, a 2% increase. The overall expected market time for homes priced above $1.25 million dropped from 373 to 300 daysover the past two-weeks. 

Year over year, luxury demand is down by 45 pending sales, or 27%,and the active luxury listing inventory is up by an additional 314 homes, or 27%. The expected market time last year was at 207 days, significantly better than today.

For homes priced between $1.25 million and $1.5 million, in the past two-weeks, the expected market time decreased from 252 to 185 days. For homes priced between $1.5 million and $2 million, the expected market time decreased from 365 to 305 days. For homes priced between $2 million and $4 million, the expected market time decreased from 347 to 314days. For homes priced above $4 million, the expected market time decreased from 1,279 to 794 days. At 794 days, a seller would be looking at placing their home into escrow around the end of March 2021.

MARKET SUMMARY

• ·The active listing inventory increased by 211 homes in the past two weeks and now totals 6,122, a 4% rise. Last year, there were 3,774 homes on the market, 2,348 fewer than today. There are 62% more homes than last year.
• In 2018, 11% fewer homes came on the market below $500,000 compared to 2017, andthere were 26% fewer closed sales. Fewer and fewer homes and condominiums are now pricedbelow $500,000. This price range is slowly vanishing.
• Demand, the number of pending sales over the prior month, climbed in the past two-weeks by 270 pending sales, up 21%, and now totals 1,435, its lowest level for this time of the year since 2008. Last year, there were 1,764 pending sales, 23% more than today.
• The Expected Market Time for all of Orange County decreased from 152 days two weeks ago to 128 days today, a slight Buyer’s Market (between 120 to 150 days) and the highest level for this time of the year since 2011. It was at 64 days last year.
• For homes priced below $750,000, the market is a Balanced Market (between 90 and 120 days) with an expected market time of 97 days. This range represents 44% of the active inventory and 58% of demand.
• For homes priced between $750,000 and $1 million, the expected market time is 102 days, a Balanced Market. This range represents 18% of the active inventory and 23% of demand.
• For homes priced between $1 million to $1.25 million, the expected market time is 156 days, a Buyer’s Market.
• For luxury homes priced between $1.25 million and $1.5 million, in the past two weeks, the expected market time decreased from 252 to 185 days. For homes priced between $1.5 million and $2 million, the expected market time decreased from 365 to 305 days. For luxury homes priced between $2 million and $4 million, the expected market time decreased from 347 to 314 days. For luxury homes priced above $4 million, the expected market time decreased from 1,279 to 794 days. 
• The luxury end, all homes above $1.25 million, accounts for 30% of the inventory and only 13% of demand.
• Distressed homes, both short sales and foreclosures combined, made up only 0.9% of all listings and 2.1% of demand. There are only 17 foreclosures and 39 short sales available to purchase today in all of Orange County, 56 total distressed homes on the active market, down 11 from two-weeks ago. Last year there were 47 total distressed homes on the market, slightly less than today.

• There were 1,789 closed residential resales in December, 21% fewer than December 2017’s 2,269. December marked a 12% drop over November 2018. The sales to list price ratio was 96.3% for all of Orange County. Foreclosures accounted for just 0.4% of all closed sales, andshort sales accounted for 0.7%. That means that 98.9% of all sales were good ol’ fashioned sellers with equity.

*Information taken from Steven Thomas, Quantitative Economics and Decision Sciences