Happy New Year everyone! The latest Market Time Report is out, so here it is!

If you're new to reading the Market Time Reports, these are put out by my company's President every two weeks, and they analyze the current market conditions: how long homes are remaining on the market, how sellers should react, how buyers should react, etc. Reading them regularly over time helps to give you (and me!) a feel for the market, and a basis for how to approach it moving forward.

If your New Years Resolution involves buying or selling your home, and you live in Orange County, let's talk!

Market Time Report: HAPPY NEW YEAR – A 2007 FORECAST

December 28, 2006

Good Afternoon!

HAPPY NEW YEAR!!! Now, what does that mean for real estate? First, let’s take a look back at what happened in 2006. We started the year with 7,243 homes on the market and 1,807 homes placed into escrow within the prior 30 days. The market time had just eclipsed the four month mark after methodically growing throughout 2005 from a low of 1.13 months in February 2005 to 4.01 months in the last week of December 2006. In the trenches, we knew that times were changing, that the nearly nine year run of phenomenal appreciation was ending. But the market psyche was not ready for a change. The entire real estate industry and the general public had grown accustomed to thinking that rapid appreciation was somehow normal. It is analogous to driving at 75 miles per hour on a road trip for several hours only to exit the freeway and encounter a speed 45 miles per hour on surface streets while searching for an adequate hotel.
Even though the car is moving forward, it feels as if it is in slow motion. In 2006, the Orange County market still experienced a normal real estate cycle, just at about a 31% slower pace compared to 2005. Demand, the number of homes placed into escrow during the prior 30 days, fell during the first couple of weeks of January to 1,573 homes. Demand then climbed throughout the Spring market, peaking at 2,958 homes in the beginning of April. Demand dropped during the Summer market and bottomed out at 2,132 homes in mid-July prior to peaking for the Summer at 2,357 homes at the end of August. Since August, demand has slowly ebbed to 1,581 homes today, 226 fewer than this time last year. The active inventory for Orange County continued to grow from the beginning of 2006 until it peaked at the end of August at 16,006 homes on the market. Since August, the inventory has dropped consistently to 11,879 homes today, 4,636 additional homes compared to last year at this time. The market time dropped from a 4.85 month market in mid-January to a low for the year of 3.13 months achieved at the end of February. As the inventory grew, so did the market time, until it finished its growth spurt in mid-July at 7.2 months inventory. Since July, the market time has bounced between an inventory of 6.79 months and 7.59 months. Today, the market time stands at 7.51 months.

For 2006, the significant drop in demand had a rippling effect on the market. There simply were a lot more sellers than buyers in the marketplace. With homes not selling in days or weeks and more sellers placing their homes on the market in the Spring, the active inventory continued to grow. As the inventory grew, so did the market time. Faced with an inventory that had grown to 16,000 homes and Fall and Winter markets around the corner, many sellers began to get it at the end of August, either pricing their homes to sell or ending the hassle and pulling their homes off the market. As the inventory dropped, so did demand. So, what happened to prices in 2006? According to many economic and real estate experts, an inventory below five months is considered a sellers market, an inventory between five and six months is considered to be at equilibrium, and an inventory greater than six months is considered a buyers market. Inventories above the 10 month mark are considered a deeper buyers market, just as an inventory below two months is considered a hot sellers market. With that in mind, the inventory was a sellers market through the end of May. Naturally, it was not the sellers market of prior years with multiple offers and just days or weeks on the market marked by rapid appreciation. Nevertheless, the median price for Orange County continued to post record levels until it peaked in June at $646,000. In June, the inventory popped above five months and has been hovering around the seven month mark since July-buyer’s market territory. Thus, the median price has slowly but surely eroded to its current November level of $616,000. Comparing the median price year over year, it is virtually unchanged. What really occurred was appreciation for the first half of 2006 and then just about the same amount of depreciation over the second half. It is also important to factor in unrealistic expectations for the first half of 2006 and a reality check for the second half. Sellers, buyers and the entire real estate community could not help but look over their shoulders to the prior protracted nine year run. Sellers priced their homes at record levels compared to comparable sales and dug in their heels while they impatiently waited month after month for a buyer. Buyers, on the other hand, had no other choice than to look at homes priced at record levels. So, the standoff between buyers and sellers was established. Many buyers still bought. Others sat on the fence waiting for the right deal to come along. Many buyers are still sitting on the fence, waiting. After the inventory eclipsed 16,000 homes, sellers’ expectations began to evolve, becoming much more realistic. After a gut check, many sellers either realistically priced their homes or opted to throw in the towel and pull their homes off the market.

Finally, in looking back at 2006, it would be a mistake to not discuss the vacancy rate of the active listing inventory and the disparity between detached and attached homes. In reading Jonathon Lansner’s Orange County Register blog back in September, I was astounded to hear that 25% of the active listing inventory in Orange County was vacant. After immediately checking the MLS to ascertain the validity of the statistic, I was shocked to find the vacancy rate was actually 27.5%. As more and more sellers took their homes off the market, the percentage of active listings that were vacant continued to grow. Today, the number of homes that are vacant has reached 30%. For condominiums, attached homes, the vacancy rate is at 35.3%. For detached homes, the vacancy rate is at 26.3%. Vacant home sellers are more inclined to be motivated to sell their home. Still, many have opted to attempt to lease their homes while simultaneously marketing their homes for sale, increasing their probability of finding a solution to covering their monthly costs. There is also a disparity between the market time for detached homes and condominiums. Today, the market time for detached homes stands at 7.05 months versus a market time for condominiums of 8.31 months. With more inventory to turn to and price reductions to levels that are more attractive, more buyers are turning towards detached homes.

What can we expect in 2007? Demand for 2007 will most likely closely mirror demand in 2006. There will always be demand for Orange County real estate. The current demand is just the basic demand to live in the O.C. regardless of the market conditions. Yet, there is a major difference compared to the beginning of 2006: the current active inventory. Last year, we started the year at 7,243 homes on the market. Compared to 11,879 homes today, that’s a 4,636 home difference. I am EXTREMELY concerned about the potential for the inventory to grow to 16,000 homes in May and even 20,000 homes in August. Many sellers have pulled their homes off the market in the latter half of 2006 in anticipation of the Spring market in 2007. AND, there are many homeowners who did not test the waters in 2006 who will be relying on the Spring market to sell their homes as well. It seems as if the market did not learn its lesson in its anticipation of the Spring market in 2006: too many sellers and not enough demand to exhaust the supply of available homes. So, with so many sellers anticipating the coming Spring market and demand at similar levels to 2006, there will again be too many sellers and not enough demand. Demand reached its peak in 2006 of 2,958 homes in April. There simply are not enough buyers in the marketplace to even begin to exhaust the supply. For proper perspective, demand reached 4,549 homes in February of 2005 and did not fall below the 3,000 mark until October of 2005. In October of 2006, demand dropped below the 2,000 mark. So, in expecting demand to peak at about 3,000 homes placed into escrow during the prior 30 days in April and an active inventory at 16,000, the market time will be at 5.3 months, or equilibrium. 5.3 months would be the low for market time. If demand in August 2007 matches 2006, 2,456 homes, and the active inventory grows to 20,000 homes, the market time would be at 8.2 months. For the first half of 2007, with sellers’ expectations of a great Spring market, the overall market will be sluggish as a standoff between buyers and sellers occurs again. Values will remain stable. For the second half of 2007, with a much higher market time indicative of a buyers market, home values will depreciate. By year end, the median price, year over year, could drop between 2-3%. Expect the vacancy factor to fall as more homes come on the market and then increase in the Fall and Holiday markets as more sellers throw in the towel and opt to not sell at this time. The discrepancy between the detached and condominium market should continue as well with condominiums being more difficult to sell. The typical real estate cycle will ensue, with the first few weeks of January remaining slow as everybody shakes off the effects of the holidays. Then, after the Super Bowl, the market will start to heat up (relative to how slow the holidays have been and January will be), the beginning of the Spring market. The Spring market typically peaks in April. The market will ease slightly with the Summer market, June through August. Many sellers confuse the Summer market as the best time of the year to sell, yet demand slips a little as more sellers plant “for sale” signs in their yards. As the kids go back to school in September, real estate transitions to the Autumn market where demand slips further as many unsuccessful sellers throw in the towel. Halloween and the cries for “Trick or Treat” mark the beginning of the Holiday market, notoriously the slowest time of the year as the holiday distractions set in. 2007 will be the year where sellers will start to adjust to the slower pace of demand. In 2008, fewer sellers will eagerly anticipate the Spring with the knowledge of both the Spring of 2006 and 2007. The big caveat for 2007 is interest rates and the Federal Reserve. At the very least, experts agree that rates are going to remain the same. But, many are split on whether Alan Bernanke and the Federal Reserve will lower rates in the summer. The answer lies mainly in the economic readings of inflation and there are too many factors that can influence the results (oil, a protracted war, etc.).

How should a seller approach the market? Sellers should throw all expectations of a fantastic Spring out the window. Instead, they should anticipate a lot of competition, sluggish demand and months to sell a home. This Spring is not the best time to “test” the market. Either a seller is motivated to sell and price their home according to the market value, recent sales and escrows, or they should not waste their time. Given today’s active inventory, 11,879 homes, and today’s snapshot of demand, 1,581 homes, 10,298 sellers will not be successful over the course of the next month. That figure is the proper perspective in entering the current market. Sellers need to be careful to not chase the market down in price. Buyers will avoid overpriced listings and chalk them up as a waste of time. Sellers should keep in constant contact with the changing market around them and be prepared to make adjustments. Lastly, the closer a home resembles a model home with the proper ambience, condition and lack of clutter, the better the chances of achieving success.

How should a Buyer approach the market? The best time of year to be a buyer is now through the Super
Bowl. The current pool of sellers that remain on the market are motivated just for still having their skin in the game. This will of course change with the unrealistic expectations of the coming Spring. In the Spring, Buyers will have to do their due diligence by establishing seller motivation prior to attempting to purchase. Buyers also need to keep in mind that low-ball offers typically do not result in isolating the best home that fits their needs. Instead, look for realistic sellers who price accordingly. Buyers should always be able to back up their offers with data. Interest rates are still low and are not expected to change much. Buyers should know that purchasing a home in sunny Southern California has always been an excellent historical long term investment. Buyers should establish a payment that is comfortable for their family budget and purchase according to their comfort level. Last, buyers should NOT ATTEMPT to time the “bottom” of the market. Not even the experts are able to accurately ascertain THE best time to buy. If a buyer buys with the knowledge that they are buying THEIR home and not a short term investment that they can flip in a year or two, they will be happy in both the short run and long run.

The following areas have inventories of six and a half months or less: Aliso Viejo, Anaheim Hills, Brea, Cypress, Dove Canyon, Foothill Ranch, Fullerton, Huntington Beach, Lake Forest, Mission Viejo, Portola Hills, Rancho Santa Margarita and the range of homes between $500,000 and $750,000.

The following areas have inventories between eight and a half and ten months: Canyon Areas, Corona Del Mar, Laguna Woods, San Clemente, Villa Park and Westminster.

The following areas have inventories greater than ten months: Buena Park, Dana Point, Laguna Beach, Newport Beach, Newport Coast, Santa Ana and all ranges above $1 million.

Happy New Year!