By Steven Thomas
Buyers who are waiting for the Orange County housing market to change are in for a long wait.
The Orange County housing market has been appreciating for more than ﬁve years. It has been like the initial chain-lift hill on one of the roller coasters at Knott’s Berry Farm. Clickety-clack, clickety-clack, clickety-clack … it seems as if the housing roller coaster could go up forever. Yet, many buyers believe the ascending coaster must reach a peak soon.
Housing does not go up forever. There are peaks, and there are troughs. There are times when buyers are in control, and there are times when sellers are in control. The skeptical buyers who are waiting for an end to this madness ﬁnd many reasons to expect a housing downturn. They point to record prices. They recall mid-2007, when the housing market began to unravel; however, before the market unraveled, almost everyone believed it would increase forever. Very few economists and prognosticators forecast a crippling housing downturn.
The buyers who expect a downturn are right. The market will eventually reverse course and depreciate. The question is, “When?” And the answer is emphatically, “Not anytime soon!”
To understand why the market is poised to continue climbing, it is best to dust oﬀ that old Econ 101 book and read about supply and demand. A situation with a large supply and very little demand favors the buyer. A situation with a small supply and high demand favors the seller. With years of short supply and strong demand, it is no wonder that the housing market has been a hot seller’s market for quite some time now.
At the start of August, there were 5,824 homes on the market, the lowest level for that time of year since 2013. Back then, there were 5,522 homes on the market, and it was even more diﬃcult for buyers to secure a home than it is today. For housing to move away from a seller’s market toward a balanced market—that is, one that does not favor either buyer or seller—there must be at least 8,000 homes on the market for a sustained period. The more homes on the market, the higher the supply of homes. With more supply often comes softened demand. Only then could housing ﬁnally shift toward a buyer’s market.
And that is the issue. Supply needs to increase and demand, to remain the same or increase at a slower rate. For proper perspective, at the end of June 2007, there were 17,250 homes on the market, and the expected market time (that is, the amount of time a home is on the market before being placed in escrow) was more than nine months. Demand (the last month of pending sales) was 1,894 back then compared with 2,885 in June of this year. Just a couple months ago, the expected market time was 62 days, quite a bit diﬀerent from what it was a decade ago (see Figure 1).
This year, the active inventory has already peaked. It had a hard time pushing past the 6,000-home mark. Remember, for the market to start tilting in the buyer’s favor, the inventory needs to be above 8,000 homes for a sustained period. Typically, the inventory peaks around mid-August, but not this year. The theme for 2017 has been fewer homeowners listing their homes for sale. Ten percent fewer homes have come on the market in July, and 7 percent fewer overall this year. As a result, the Orange County active inventory peaked quite early (see Figure 2).
The trend of a lack of inventory and red-hot demand stoked by ultra-low interest rates does not look like it will change anytime soon. Multiple oﬀers are the norm. This holds true for just about any property priced below $1.25 million that is in great condition, nicely appointed, in a good location, and priced close to its Fair Market Value. And, in the lower price ranges, buyers are tripping over one another to secure their piece of the American Dream.
In short, buyers who are waiting for the housing market to change are in for a long wait.
Steven Thomas has a degree in quantitative economics and decision sciences from the University of California, San Diego, and more than twenty years of experience in real estate. His bimonthly Orange County Housing Report is available by subscription and provides housing market analysis that is easy to understand and useful in setting the expectations of both buyers and sellers. His website is www.ReportsOnHousing.com.