Here's the latest one, folks!
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Market Time Report: Spring Pause?
March 8, 2007
It looks as if we will have to wait until the official first day of Spring, March 21, for the Spring market to heat up. Over the last two weeks the Orange County real estate market has changed direction slightly after improving for 6 weeks straight. The current active inventory increased by 364 homes in the past two weeks to 12,558. Demand, the number of homes placed into escrow within the prior 30 days, actually dropped by 266 homes in two weeks to 2,388. The Orange County market time increased from 4.59 months two weeks ago to 5.26 months today. At 5.26 months, the market is in equilibrium, neither a buyers nor a sellers market. For most economists, markets below a 5 month inventory indicate a sellers market and market above 6 months indicate a buyers market. So, what happened to the Orange County real estate market in just two weeks? Actually, it is a cyclical phenomena. The first week in March typically realizes a drop in demand as the inventory increases. In 2006, there was a 4% drop in demand in two weeks. In 2005, there was a 5% drop. This year, there was a 10% drop. The cycle continues with an increase in demand and then a leveling off for the rest of the Spring, through May. The inventory is still not climbing at last year’s rate, a healthy sign that sellers are cautiously approaching the market. Hopefully this trend continues. We began 2007 with 946 fewer homes placed into escrow within the prior 30 days and an active inventory with 1,335 fewer homes compared to today. For perspective, the market time one year ago today was at 3.44 months. The number of homes placed into escrow within the prior 30 days was an additional 391 homes or 2,779 escrows. The active inventory was at 9,562 homes, 2,996 fewer than today. The year over year comparison in the active inventory is beginning to diminish as the inventory was growing at a considerably faster pace in 2006.
Some cities are experiencing tremendous buyer activity while others are wondering if the sluggishness of the Holidays will ever pass. Fortunately, thus far in 2007, the Orange County active inventory has not increased at 2006’s unprecedented pace. In 2006, the inventory was growing by 500 homes in just two weeks. Remember, when the inventory grows, it is NET GROWTH. That means that after subtracting out the number of homes placed into escrow, homes placed on the market not only fills the gap due to homes now in escrow (they are no longer active) but the inventory grows by an additional 500 homes.
The condominium and detached home markets are mirror images of each other with both at inventories of 5.26 months. The true difference in the markets lies in the number of vacant condominiums actively on the market compared to the number of detached vacant homes. For condominiums, 32.8% of the active inventory is vacant compared to 23% of all detached homes.
What can we expect in the coming months? With the market stabilizing because Spring is in the air, it will be interesting to see how buyers will react. Demand thus far has been lower than last year’s demand, between 8 to 10% less thus far. This trend should continue unless there is a major change within the marketplace such as a swing in interest rates. Market time should continue to increase as the inventory rises and demand levels off through the Spring. Since the current trend is a slow growth in the inventory, we may not hit the 16,000 home mark, the height of the active inventory in 2006, until August. This is a healthy sign that the market has stabilized. So, for the rest of Spring, demand will be at its highest levels of the year as more sellers enter the market in anticipation of being out of their homes during the summer months while the kids are out of school. Summer, June through August, is typically marked by a slight decrease in demand as the active inventory rises. Many sellers mistake the Summer market as the best time of the year to sell. It is the second best time of year to sell. As the kids start their school year, the market shifts gears into the Autumn market. In the Autumn market, the end of August through October, demand typically softens a bit more as many discouraged sellers start to pull their homes off the market and the active inventory starts to drop. The Holiday market, Halloween through the first two weeks of the New Year, is marked by the lowest demand of the year as only the hardiest of sellers remain on the market.
How should a seller approach the market? Sellers should approach the market with extreme caution, even though we are in the Spring market. Sellers should NOT look for record prices, there’s just too much competition. Instead, they should carefully approach pricing by poring over the most recent comparable sales and all escrow activity. Do NOT place too much emphasis on neighborhood active listing pricing UNLESS a home is priced below sales and escrows. There are 12,558 homes currently on the market and 2,338 homes placed into escrow within the prior 30 days. Based upon current demand, 10,270 sellers will not be successful over the course of the next month. If a seller is truly motivated to sell, then they should do what it takes to sell their home. Simply put, the keys to success are price, condition and location. The sellers can only control two of the three keys. Unrealistically pricing a home is a waste of everybody’s time and energy and just waters down the market. The better a home’s condition, the higher the probability of achieving success. Sellers should strive to remove clutter and maintain the appearance of a model home. Model homes are spotless, all lights are on, soft music is playing in the background and window coverings are wide open. To improve a home’s marketability, sellers should strongly consider addressing all COSMETIC fixes. That does not mean remodeling the kitchen. Investors look for homes in need of cosmetic repair and pay less than market value, address the cosmetic repairs themselves and then turn around and sell the homes for a profit. Every dollar spent on cosmetic repairs adds more than a dollar to the homes value. Some examples of cosmetic repairs include replacing soiled carpet, replacing cracked tiles in the kitchen, replacing a leaking roof, painting scuffed walls both inside and out, etc. Not only do these repairs add to the net value of a home, but they increase their marketability.
How should a Buyer approach the market? With the real estate market stabilizing, waiting for the bottom to drop out is just not a good idea. Was the bottom reached last year or will it be at the end of this year? If the experts are not able to accurately predict the bottom, buyers certainly are not going to be able to time the market with much accuracy. Over the years, stories abound of prospective buyers that were passed up while waiting on the sidelines for the best time to buy. Buyers can take comfort in that Southern California has historically been a fantastic investment for homeowners and a place that people from around the world aspire to live. Interest rates are still at record low levels and it does not look as if Bernanke and the Federal Reserve are going to touch rates anytime soon. Buyers should still enter the market with caution. Upon finding a home that best matches their parameters, a buyer should carefully evaluate the most recent comparable sales and escrows to establish the home’s market value and then submit a realistic offer.
The following areas have inventories of less than three and a half months: Aliso Viejo, Anaheim Hills, Cypress, Dove Canyon, Fullerton, Portola Hills, Rancho Santa Margarita and Villa Park.
The following areas have inventories greater than seven months: Anaheim, Canyon Areas, Newport Beach, San Clemente, San Juan, Santa Ana, Talega and all ranges above $2 million.