A Balanced Spring Market
By Steven Thomas
It is a chilly morning in Southern California. 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 yet hot. 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 was no exception. The market had heated up by the time they flipped a coin at the fifty-yard line to begin Super Bowl LIII.
Southern California may not experience a polar vortex during the winter, but winter does exist. In fact, Southern California has four unique seasons, exactly like the rest of the country. The weather is not always
80 degrees and sunshine.
Similarly, housing is not always hot. During the last four months of 2018, a definite cold snap struck the housing market. Sales were down 17 percent year over year; and, in December, pending sales were down 21 percent.
In 2019, the housing market started off a lot colder than everyone had been accustomed to. It was the coldest start since 2011 with an Expected Market Time of 152 days, buyer’s market territory (see Figure 1).
Early in the New Year, the market began to thaw as more and more buyers entered the fray. This warming trend occurs every year. By the end of January, a couple of days before Super Bowl Sunday, the active inventory had climbed by 10 percent while demand (prior 30 days of pending sales) jumped by 40 percent. As a result, the Expected Market Time dropped from 152 days, a buyer’s market, to 110 days.
At 110 days, the Orange County housing market was a balanced market. A balanced market is one that does not favor either buyers or sellers. During the same period in 2017, the inventory increased by 14 percent and demand increased by 35 percent, which dropped the Expected Market Time from 68 to 57 days, a hot seller’s market.
This year’s market is completely different from what we’ve experienced in the past seven years. From 2012 through 2018, housing moved to a seller’s market by the end of January. In most instances, it quickly moved to a hot seller’s market with Expected Market Times below 60 days. That was not true for 2019. Instead, the market moved to a balanced market. Sellers were not in the driver’s seat like they had been from 2012 through 2018.
Orange County housing started the year off on a completely different foot in 2019, and it was all because of the shift in the market during 2018. The shift was a move away from the recurring theme of “not enough homes on the market” to “not enough demand.” For years, the story was that housing was suffering from a supply problem, but that morphed into a demand problem late last year. It was good old-fashioned supply and demand from Econ 101. These shifts caused the market to change.
Since 2012, housing has had very little supply and plenty of demand, which favors sellers. But, in 2018, as the supply increased and the demand dropped, the market shifted from a seller’s market to a balanced market to a slight buyer’s market (see Figure 2). That is precisely where housing started 2019, as a slight buyer’s market. A slight buyer’s market is one in which prices are not falling that much at all, but buyers no longer must trip over one another to purchase. Buyers can take their time and call more of the shots in the purchase contract. They are in control.
By the end of January, the market had thawed enough to shift to a balanced market. This paves the way for a Spring Market that will be better than the end of 2018 but will not be as sizzling as what everyone has become accustomed to.
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 simply will not be as robust as it has been during the past seven years. Many homeowners and sellers are holding their collective breath with high expectations for the Spring Market. Remember, it is a balanced market, not a seller’s market. It will remain balanced until mid-May. Demand will remain relatively stable 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 simple: supply and demand. The supply of homes, the active listing inventory, was up 57 percent over last year at the end of January. Demand, the last 30 days of pending sales, was down 18 percent (see Figure 3). With more competition among sellers and less demand from buyers, the market feels a bit sluggish. The last time the Orange County housing market was balanced during the spring was in 2011.