Many economic forecasters are beginning to talk about a robust second half to the 2019 real estate market. They point to the tremendous drop in interest rates as a catalyst to a strong increase in buyer demand. Their analysis is that rates have dropped more than a full percentage point since last November, which has improved affordability dramatically. They are correct; affordability has improved considerably. The payment for a $650,000 mortgage has dropped from $3,489 per month at 5% in November last year, to $3,103 per month at 4% today. That drops a home buyer’s mortgage payment $386 per month lower than last year.
Although mortgage rates have moved significantly lower than last year’s fourth quarter rates, the number of pending home sales has remained even with last year’s demand for homes. We believe this will change in the second half of 2019. That is when the interest rate gap between 2018 and 2019 will be more dramatic.
For years now, we have heard that there are just not enough homes on the market. Many stated that if there were more homes available for sale, that there would be even more pending and closed sales. There have been more homes for sale this year compared to last year, and demand for homes has remained level for 14 straight months.
For the second half of this year, with the interest rate difference stretching to 1.25% lower than last year’s rates, pending sales are expected to increase relative to the same time in 2018. In 2018 interest rates climbed all the way to 5% by November. In November 2018, year over year demand was down by 23% compared with the same time in 2017.
Another measurement for today’s real estate market, is to compare this year’s active listing inventory, demand, and closed sales numbers to two years ago in 2017, when interest rates were similar to today, and the market was much hotter. Although nearly identical to 2018, current demand has been 15% lower compared to July 2017. The active listing inventory is 26% higher than July 2017, and 15% higher than last year. The Expected Market Time today is 92 days, compared to 63 days in July 2017 and 80 days last year. June 2019’s closed sales are down 16% compared to June 2017, and down 6% from last year. This indicates a slower pace for home sales, even though buyers have more inventory to choose from.
An interesting trend is that despite the incredible improvement in affordability due to low interest rates, buyer demand for homes remains softer this year. Lower rates have not ignited an increase in demand for homes relative to last year. Homes appreciated significantly from 2012 through the first quarter of 2018, rising over 70%. That rise has dropped the affordability rate from nearly 40% in 2012, to around 21% today. Although buyer demand for homes is expected be stronger in the third and fourth quarter this year compared with 2018, it will be softer than 2013 through 2017. Home sellers should expect fewer closed sales, and a market where pricing is absolutely crucial in order to find success.
Active Inventory:
Even with the lowest interest rates in 3 years, Orange County active listing inventory has remained consistent, and now totals 7,561. The active listing inventory typically continues to rise until peaking in July or August. However, in the month of June, 12% fewer homes came on the market compared to June 2018. Fewer homes coming on the market eases competition a bit. This recent phenomenon has not had an impact on the overall market yet.
Last year at this time there were 6,579 homes on the market. That means that there are 15% more homes available todaycompared with 2018. This continues to be the highest level of homes on the market for this time of the year since 2011.
Demand: Housing has transitioned into a Balanced Market.
Demand, the number of new pending sales over the prior month, dropped by 200 pending sales in the past four weeks, down 8%, and now totals 2,461. Demand continues to drop during the Summer Market, typical for this time of the year. The real story is how demand remains subdued despite the extremely favorable drop in interest rates. Demand is expected to drop through the rest of summer and then will downshift when the kids go back to school in August, the beginning of the Autumn Market.
Last year at this time, pending sales were nearly identical to today. In 2017, pending sales were 15% stronger than today. The current Expected Market Time increased to 92 days in July. 90 to 120 days is considered a balanced market, one that does not favor sellers or buyers. In 2018, the Expected Market Time was at 80 days, better than today, even with the higher interest rates last year.
Luxury End of the Orange County Real Estate Market:
Extra seller competition and continued softer demand compared to 2017 (the last time the luxury range was stronger) is a trend that is expected for the remainder of the year.
For homes priced between $1.25 million and $1.5 million, in the past two-weeks, the Expected Market Time increased from 118 to 143 days.
For homes priced between $1.5 million and $2 million, the Expected Market Time decreased from 192 to 189 days.
For homes priced between $2 million and $4 million, the Expected Market Time increased from 250 to 262 days.
For homes priced above $4 million, the Expected Market Time decreased from 667 to 518 days. At 518 days, a seller would be looking at placing their home into escrow around December 2020.
Orange County Housing Market Summary:
For homes priced below $750,000, the market is a slight Seller’s Market (between 60 and 90 days) with an expected market time of 64 days. This range represents 39% of the active inventory and 55% of demand.
For homes priced between $750,000 and $1 million, the expected market time is 79 days, a slight Seller’s Market. This range represents 19% of the active inventory and 22% of demand.
For homes priced between $1 million to $1.25 million, the expected market time is 98 days, a Balanced Market.
For luxury homes priced between $1.25 million and $1.5 million, in the past two weeks, the Expected Market Time increased from 137 to 143 days.
For homes priced between $1.5 million and $2 million, the Expected Market Time decreased from 192 to 189 days.
For luxury homes priced between $2 million and $4 million, the Expected Market Time increased from 250 to 262 days.
For luxury homes priced above $4 million, the Expected Market Time decreased from 667 to 518 days.
The luxury end, all homes above $1.25 million, accounts for 35% of the inventory and only 14% of demand.
Distressed homes, both short sales and foreclosures combined, made up only 0.7% of all listings and 1.5% of demand. There are only 20 foreclosures and 35 short sales available to purchase today in all of Orange County, 55 total distressed homes on the active market. Over 99% of all home sales are sellers with equity.
There were 2,715 closed Orange County residential resales in June. This is down 6% compared with June 2018. June home sales are down 7% from May this year. This is to be expected as the Spring market for home sales trends stronger than the summer market; and of course the summer market trends stronger than the fall and winter market.
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