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Market Time Report: Holiday Distractions

November 2, 2006

Good Afternoon!

As we sneak a few Reese’s Peanut Butter Cups from our kids’ Halloween stash, we are reminded that the Holiday real estate market is upon us. In the past four weeks, demand has remained steady. 1,987 homes were placed into escrow within the prior 30 days, a drop of only four homes in four weeks. During that same four week period, the active listing inventory has dropped by 753 homes. In the past two weeks alone, the active inventory has shed 534 homes. Today’s inventory is now at 14,729 homes. The active inventory peaked at the end of August when it eclipsed the 16,000 home mark. But, there was more demand at the end of August when 2,357 homes were placed into escrow within the prior 30 days. Back then, Orange County’s market time was at 6.79 months. Ever since then, the market time for the county has bounced between 7.1 months to a height of 7.78 months four weeks ago. Today, the market time is at 7.41 months. Now that the Holiday market has officially kicked off, we can expect demand to slowly decline as more and more homes are pulled off the market to enjoy all of the distractions of the holidays. Attached homes and detached homes are now experiencing similar market times. The market time for attached homes has dropped in the past four weeks from 8.18 months to 7.58 months today, while detached homes have changed very little, 7.39 months four weeks ago compared to 7.30 months today. The number of active listings that are vacant has not changed. 33.5% of all active attached listings are vacant compared to 24.8% for all active detached listings. Overall, 28.2% of all active homes on the market are vacant. Many of these owners are attempting to lease their homes while pursuing a buyer willing to purchase. They are banking on one or the other occurring in the short term.

A year ago, the active inventory was at 8,259 homes, 6,470 fewer than today. Demand, the number of homes placed into escrow within the prior 30 days, was at 2,750 homes a year ago, 763 additional escrows. Market time had been steadily increasing and arrived at the three month mark on November 3, 2005 for the first time in 2005. The inventory continued to climb, until it eclipsed the four month mark at the end of December. Demand dropped from the 2,750 home mark to 1,807 homes placed into escrow within the prior 30 days on December 29th.

In taking a close look at price ranges, it is obvious that the higher the price, the more competitive the market for sellers. The various price ranges tell the biggest story. For homes listed above $1 million, the market is extremely slow. Above $1.5 million, market time is in double digit territory, meaning very few sellers are achieving their goal of placing their home into escrow in the course of a month.

What can we expect for the rest of the year and the beginning of 2007? Even though we have experienced a recent surge in homes pulled off the market, it is concerning that not enough sellers are ready to throw in the towel. Our offices have been buzzing with agents discussing the number of sellers still unwilling to do what it takes to get their home sold and price their homes according to comparable sales and escrows. Sellers must take into account that there are 14,729 sellers currently on the market and 1,987 homes placed into escrow in the prior 30 days. Given the most recent snapshot of demand, 12,742 sellers will not be successful over the course of the next month. Furthermore, demand will soften a bit more as we make our way through the Holiday market. The Holiday market runs from now, post Halloween, through the first few weeks of the New Year. For the rest of the year, the inventory should continue to drop. But, it is just not dropping fast enough. At the current rate of homes coming off the market, we could start the New Year with anywhere from 12,000 to 13,000 homes on the market. The number of homes pulled off the market depends upon sellers’ reluctance to throw in the towel. Mid-January is historically the lowest snapshot of demand, falling to 1,573 homes in January of this year. Given an active inventory of 12,000 homes and demand of 1,573 homes, we could very well start our year with a market time of 7.629 months, much higher than the 4.01 months at the beginning of 2006. Most concerning is that, according to our agents, many sellers are pulling their homes off the market in anticipation of the Spring market in 2007. There are also many homeowners who have bypassed the 2006 market altogether and are waiting on the Spring market as well. Ultimately, in starting the year with 12,000 homes on the market, the active inventory could blossom to over 20,000 listings in the Spring. Demand in 2007 will most likely be very similar to 2006. The only caveat is whether or not demand will be slightly boosted by a decrease in the short term rate by the Federal Reserve at the beginning of the year. At it’s best this year, demand was just shy of 3,000 homes. If the inventory climbs to over 20,000 listings, the market time will continue to bounce around seven months, much different than the 3.5 month market in the Spring of this year. As was the case for most of this year, many sellers are going to have unrealistic expectations of the coming 2007 Spring market.

How should a seller approach the market? Basically, it all boils down to MOTIVATION. Sellers who are not motivated should pull their homes off the market and enjoy the season. PERSPECTIVE is also very important. Most sellers are sitting on a mountain of equity. When a seller realistically prices their home, it is true that they may not get as much as a neighbor did ten months ago, but they have still realized a tremendous gain after years of appreciation. The right PRICE is also essential in achieving success. Painstakingly analyzing recent comparable sales and escrows and taking into account aggressively priced sellers will allow a seller to arrive at the proper price. PATIENCE is very, very important going into the Holiday market as well. Even though a seller is motivated and their home is priced right, there is NO GUARANTEED SALE. CONDITION and CLUTTER are also fundamental ingredients to achieving success. A home that is not presentable and in less than great condition is hard to sell in today’s market with so much competition. Also, a home filled with clutter makes it very challenging for potential buyers to see past all the knick-knacks. Given the Spring market mentioned earlier, Sellers must be prepared for a lot of competition and a continued slow market. Sellers also must price their homes appropriately right out of the gate or risk chasing the market down in price. A home worth $750,000 today may be worth $725,000 tomorrow. Unrealistic pricing on the onset could equate to thousands of dollars less at closing.

How should a Buyer approach the market? There are so many choices for buyers in today’s market. As we progress further into the Holiday market, by mid-December there will be more sellers who will be extremely motivated to sell their home. Thus, there will be more “blue light specials” available. As we enter the Spring, even though the inventory will build, Market Time will remain pretty close to today’s levels. The only difference will be seller motivation and expectations. Many sellers will expect the spring to be much different that the current market and will be less flexible in their pricing. The only caveat is, of course, interest rates. Bernanke and the Federal Reserve may lower the short term rate during the first quarter of 2007, which may spark a little more demand and further fuel seller rigidness. Timing the “bottom” of the market is next to impossible, even for the experts. Many buyers have been left on the sidelines in prior markets after waiting too long. It is best to look at purchasing as an opportunity to own a home. A home is not just a commodity, it is where people live out their lives and raise their families. In addition, buyers can take comfort in the fact that a Southern California home located in Orange County is an excellent long term investment. In 5 to 10 years, the real estate market will be better than today.

The following areas have inventories of less than six months: Aliso Viejo, Cypress, Foothill Ranch, Fountain Valley, and Talega.

The following areas have inventories between nine and ten months: Buena Park, San Clemente and homes between $1 million and $1.5 million.

The following areas have inventories greater than ten months: Canyon Areas, Corona Del Mar, Coto de Caza, Dana Point, Laguna Niguel, Laguna Woods, Newport Coast, Villa Park and all ranges above $1.5 million.