Active Inventory – The active inventory climbed all year and peaked much later than normal.
The year started with an active inventory of 3,397 homes. It was the second lowest start to a year behind 2013’s incredibly low 3,161 homes. Ever since the Great Recession, the trend has been fewer homeowners selling their homes. Since 2009, the number of homes placed on the market has diminished by 29% compared to the heydays of 2000 through 2007. In 2018, there were 3% more homes listed for sale compared to 2017, a little over 1,100 homes.
After a six-and-a-half-year run in housing, 2018 was the year of a shifting market where many cracks emerged. The active listing inventory continued to climb from the very start of the year and did not peak until the middle of October. Typically, the active inventory peaks somewhere between July and August, right before the kids go back to school and the market transitions to the Autumn Market. That did not happen this year. Instead, the active inventory peaked a couple of months late at 7,292 homes, slightly higher than the prior six-year average of 7,173. Normally, the active inventory drops for the remainder of the year right after peaking, but not in 2018. This year’s peak was more of a plateau, lingering around the 7,200 mark for an additional month. It was not until Thanksgiving week, the beginning of the Holiday Market, when the inventory really started to drop. That only left about six-weeks for it to descend, paving the way for a higher start to 2019.
For the first few months of the year, sellers were able to stretch their asking prices and achieve success. However, as more homes entered the fray, they began to sit. With rising interest rates, buyers were not willing to pay much more than the Fair Market Value for a home. It was all about the price of a home. Sellers who were a bit too overzealous and pumped up their prices ultimately sat on the market until they adjusted more in line with their true Fair Market Value.
The inventory more than doubled from January to mid-October, rising by 114%. With a late peak, the inventory dropped by only 20% by the end of 2018. In the past two weeks, the inventory has shed 9%, 566 homes, and now totals 5,829, the highest level for an end to a year since 2011, seven years ago. That will translate to an elevated supply of homes to start 2019. The overall temperature of the housing market has everything to do with supply and demand. More homes will pave the way for a slower housing market.
Demand: With rising interest rates, demand was muted all year.
Demand for Orange County homes (the number of pending sales over the prior month) followed a normal strong housing pattern; yet, was muted all year long. In terms of demand, the Spring Market was the hottest, followed by the Summer Market, then the Autumn Market, and, finally, the Holiday Market.
Ever since the housing market revved its massive engine back in 2012, the beginning of the housing run, the storyline was that there were not enough homes with FOR SALE signs in their yards. There was a supply problem. That was even true at the beginning of 2018. By the Spring Market, though, it was quite apparent that the supply problem morphed into a demand problem. After ringing in a New Year, demand was off by 7% compared to the prior year. That difference grew as the year unfolded. In April, demand was off by 12%. In July, it was off by 17%. And, in November, it was off by 23%.
Interest rates started the year at 3.95%. By March, they had risen to 4.5%. They peaked at 5% in November, but dropped at the end of the year retreating to 4.65%. Nonetheless, 4.65% is still a lot higher than the 3.99% average for 2017. Also, home values have risen 76% since bottoming in March 2011. Rising interest rates coupled with higher home values created a home affordability issue. According to the California Association of REALTORS®, only 20% of the Orange County population could afford the median sales price for a home. The median sales price surpassed record levels, reaching a record height of $740,000 in May, up 6.5% from May 2017. Before the Great Recession, the highest median ever was $645,000 achieved in June 2007. The 2018 height was 15% higher.
The bottom line: values had risen dramatically since 2012, substantially outstripping the rise in incomes. As a result, payments had risen too much, too fast. Fewer potential buyers were willing to pull the trigger as payments rose to unsustainable levels.
Within the past two weeks, demand dropped by 205 pending sales, or 14%, and now sits at 1,303 pending sales, the lowest reading since January 2008. Last year at this time, demand was at 1,605, or 27% more than today.
Luxury End: Luxury homes dramatically slowed in the second half of 2018.
2017 was a record-setting year for the most sales ever above $1.25 million. There were 30% more than 2016 and that year was a record-setting year as well. In 2018, Orange County set yet another record, up 1% over 2017. There were 3,945 closed luxury sales compared to 3,897 in 2017. Yet, a major crack emerged as the luxury market slowed considerably in the second half of the year.
The Orange County luxury home market started off robust. In the first half of 2018, there were 10% more luxury sales year over year. But, demand started to drop during the Spring Market. That translated into a slower third quarter with 1% fewer closings year over year. The brakes were pumped a bit more over the summer with even less demand, which resulted in 12% fewer year over year sales in the fourth quarter.
The luxury market was stronger than ever at the beginning of the year; yet, it too succumbed to the same shifts in the housing market as in the lower price ranges. The luxury inventory continued to grow as demand dropped. The inventory peaked for high-end homes in mid-October at 2,163 homes, 19% higher than in 2017. Demand at that time was at 258 pending sales, 15% fewer than 2017. With more supply and muted demand, the market felt a lot more sluggish in the second half of the year. There simply were not enough buyers actively looking to buy. On the other hand, there were plenty of sellers competing with each other, the higher the price, the slower the market.
In the past two weeks, demand for homes above $1.25 million decreased from 186 to 176 pending sales, down 5%. The luxury home inventory decreased from 1,932 homes to 1,796, a 7% drop in the past two-weeks.
Expected Market Time: As the market shifted from a supply problem to a demand problem, the market shifted from a Seller’s Market to a Balanced market, and finally to a slight Buyer’s Market.
The Expected Market Time, the amount of time it would take to place a home listed today into escrow down the road (based upon current supply and demand) dipped to below 60-days, a HOT seller’s market, from February through April. It seemed as if 2018 was shaping up to be the seventh consecutive year for the vigorous housing run. However, the active inventory grew at a rate not seen since 2006. At the same time, demand dropped considerably from April through the end of the year. By July, demand dropped to levels not seen since 2007, where they remained through December.
With rising rates, the supply problem morphed into a demand problem, and the market continued to cool. Year over year, the Expected Market Time in 2018 was higher from March on. By July, the market felt extremely sluggish as the market time lengthened. By September, the Expected Market Time surpassed the 90-day mark, a Balanced Market, for the first time since 2014. A Balanced Market is one that does not favor buyers or sellers. Multiple offers are no longer the norm, buyers are not tripping over each other to purchase, and home values are no longer appreciating at all.
During the Autumn Market, demand continuously dropped while the active inventory grew and did not peak until mid-October. The inventory did not drop much until Thanksgiving. Consequently, the Expected Market Time rose sharply. Typically, it remains relatively flat through the end of the year due to both the inventory and demand dropping at the same time. As the Expected Market Time swelled, Orange County housing transitioned from a Balanced Market to a slight Buyer’s Market in mid-November for the first time since January 2011. A “slight” Buyer’s Market is one that is not experiencing much depreciation. Buyers have the upper hand, they no longer have to rush, and they can call more of the shots. But, it is not a market for writing unrealistic, lowball offers in hopes that some desperate seller is going to bite. It is NOT a deep buyer’s market. That occurs when the Expected Market Time surpasses the 150-day mark.
The expected market time for all of Orange County grew from 127 days two-weeks ago to 134 days today. The start to 2019 is going to be the slowest in eight years, and it will initially be a slight Buyer’s Market.
The 2019 Forecast: A sluggish year.
The U.S. economy was strong throughout 2018. Unemployment was at record lows. The GDP was up considerably. The new corporate tax cut juiced an already hot economic landscape. But, as the year unfolded, tailwinds emerged. The Federal Reserve increased short-term rates four times. Long-term interest rates grew from 4 to 5% before receding slightly at the end of the year. Wall Street had a tumultuous ride, ending up down for the year. The trade war took center stage and became a drag on the overall economy. Finally, new home sales have been on a steep slide for the past year. 2018 was about a shifting economy. While the economy may still be strong, its strength is fading. With interest rates remaining elevated and more headwinds to come, the local housing market is not going to improve much in the coming year. Here is the forecast:
• Active Inventory – the year will begin with around 5,500 homes, the highest start to the year since 2012. That will translate to a very slow start for housing. Just as in 2018, with muted demand, many homes that are marketed will linger. One out of every four homes will not find success. The number of homes that are placed on the market will not change much from prior years, but due to fewer closed sales, the inventory will rise. Expect the inventory to peak in August between 8,000 to 8,500 homes.
• Demand – with elevated interest rates and values remaining near record levels, affordability will continue to be an issue, muting demand. While there will still be plenty of buyers purchasing, the numbers will continue to be subdued throughout the year. Demand will be at its strongest level during the Spring Market. The market will improve from a slight Buyer’s Market to a slight Seller’s Market during the spring with very little appreciation. Buyers will not want to pay much more than the Fair Market Value for a home. Demand will drop from the June through the end of the year. The market will quickly shift to a Balanced Market in the summer. During the Autumn Market, housing will slow to a slight Buyer’s Market. By Thanksgiving, expect local housing to shift to a deep Buyer’s Market where values drop. Appreciation will be negligible for the first three-quarters of the year before dropping between 2-3% by the end of the year.
• Housing Cycle - the housing market will follow a normal housing cycle. The strongest demand coupled with plenty of fresh inventory will occur during the Spring Market. This will be followed by slightly less demand and a continued new supply of homes in the Summer Market. From there, demand will drop further along with fewer homes entering the fray in the Autumn Market. Finally, all the distractions of the Holiday Market will be punctuated with the lowest demand of the year and few homeowners opting to sell.
• Closed Sales - the number of successful, closed sales will drop between 4 to 8% compared to 2018 (2018 was down 10% compared to 2017), around 26,000.
• Luxury Market – luxury sales will decrease from 2018’s record by about 10%. The Spring Market will be the strongest for luxury, yet demand will still be muted. The second half of the year will be especially sluggish.
• Interest Rates – there is quite a bit of pressure for interest rates to rise, from Federal Reserve short-term interest rate increases, to quantitative tightening, to low unemployment, to an overall strong economy. Yet, there is quite a bit of turmoil abroad, which breeds uncertainty. Consequently, U.S. treasuries will continue to be a safe haven as a hedge against uncertainty. These two counter forces, pressure for interest rates to rise and uncertainty, work against each other, so there will not be a lot of movement in long-term rates. By year’s end, expect interest rates to stretch to 5.125%.
• Distressed Inventory – in 2018, distressed sales, foreclosures and short sales combined, only accounted for 1% of all closed sales, 313 total. With a slowing housing market, expect distressed sales to rise by 20%, to about 376.
For a full copy of this report, click here!
The bottom line, 2019 will continue shifting away from sellers and line up more in favor of buyers. It will finally be the buyer’s turn during the second half of the year. Sellers will not get away with overpricing just as buyers will not get away with lowball offers. Sellers will have to pack their patience in 2019. Gone are the days of multiple offers and instant gratification. Instead, price will be king.
Happy New Year!