July Housing Market Forecast for Orange County
What’s been happening over the last few weeks?
-Inventory is rising - Up 8% in the last two weeks
-Demand is shrinking - Down 5% in the last two weeks
-Interest rates on the rise again but still hovering around 3%
-Mortgage applications are dropping (good indication that future demand over the next 30-90 days will continue to decrease)
In the news: Foreclosure and Eviction Crisis?
There is so much data that shows that there is no indication that we are going to have a wave of foreclosures flood the market causing a housing market crash anytime soon. I could write pages on all of the different data that shows this, but below are a few key areas on both the supply and demand side of the market that I think are important to keep in mind when seeing these click-bait headlines about a housing crisis happening soon.
Supply
Yes, there will eventually be some foreclosures as well as evictions that ultimately lead to the landlord having to go through the foreclosure process due to them falling behind on their own mortgage, however there will not be enough to really impact the market in any significant way for two main reasons:
- Evictions and foreclosures are not going to hit the market in the numbers needed and fast enough to make a dent in the current supply shortage we have
It was just announced that California is spending 5.2 billion dollars to help lower income tenants payback overdue rent to their landlords. If the tenant makes 80% or less of the area’s median income (most renters make less than the median income in the city they live), and can pay back 25% of want they owe in back payments by September 30th, the government will use the funds to cover the remaining 75% so the landlord is made whole again. This is going to prevent a lot of evictions as long as tenants, or landlords on behalf of their tenants, apply for the funds. This is one of the main reasons why California extended the eviction moratorium to the end of September so there are now 2 extra months for these funds to be distributed to those who need help the most.
The CFPB just announced some guidelines for loan servicers as they prepare to start the foreclosure process on those who have fallen behind on payments. Basically between now and the end of 2021 the loan servicer needs to exhaust all possible options including allowing the homeowner to either add the payments they missed during their forbearance period to the end of their loan, restructuring their loan or interest rate to add more years onto their mortgage, or to sell their home before they start the process of foreclosing on their home. This will allow most homeowners that have a job to exit forbearance and keep their home, and will allow those who still can’t find employment to sell their home and pay off the loan. It’s important to also remember that home owner equity has risen dramatically over the last few years (especially last year) to a point where more than 90% of homeowners with a mortgage can now sell their home and after fees walk away with money in their pocket or at least breaking even.
Finally it’s important to remember two things, not all homeowners went into forbearance at the same time, and the foreclosure process takes months or longer to go through, so although we will definitely start seeing some foreclosures at some point, many won’t be happening until mid 2022 and be spread out all the way through 2023.
- Existing inventory is still at historic lows
Homeowners don’t want to place their homes on the market because they are scared they won’t be able to find a new home to live in and don’t want to overpay for their next home. Many homeowners are unaware that there are protections they can write into a contract that will guarantee they don’t end up selling their home before securing a new place to live. This fear to list their home just makes the inventory shortage worse, which is further preventing them from want to place their home on the market, its a downward spiral that won’t stop until the homeowner changes their mind or inventory goes up to a point where they feel more comfortable listing.
The second reason homeowners aren’t placing their homes on the market is due to them either refinancing recently and they don’t want to loose the great rate they got on their mortgage loan and don’t want a higher property tax bill when they buy a new home that is more expensive, or they have so much equity because of the recent rise in appreciation that they would rather just tap into that and build additional rooms and upgrade their current home to make it better fit their needs.
On top of homeowners staying in their homes longer than ever before, new home builders have been under-building for years now which is only making the inventory shortage worse. The recent sky-high lumber prices also haven’t helped this trend and new home inventory will continue to be a problem for the foreseeable future.
When you take all of this into account you can see there is no giant wave of homes hitting the market anytime soon, but what about the demand side?
Demand
The #1 reason demand is currently at historic highs and will remain that way is, you guessed it, interest rates. Although they have been rising since the beginning of the year (they started January around 2.65% and are now hovering slightly above 3%), and they are predicted to continue to rise for the remainder of the year, no one is predicting they are going to get to a point that will dramatically decrease demand anytime soon. They would have to get into the 3.7%+ range to really have any noticeable impact on the market and even higher than that to really start seeing demand drop to a point where home values start to fall. Most housing economists are predicting well below 3.5% rates by the end of year and with the Feds not raising their rates until 2023, it hard to see interest rates rise significantly before then.
The second reason demand will continue to stay high is we are seeing the largest demographic patch in the history of the US enter the housing market for the first time. Yes, I’m talking about Millennials. Millennials have delayed home buying longer than previous generations but they are now getting married and having kids and the one bedroom apartment or the spare bedroom at their parents house just isn’t doing it for them anymore, they want a place of their own and their salaries have risen to a point where a mortgage is now doable.
Lastly, and this is a direct side effect of the covid lock downs, American's savings accounts have increased dramatically over the last 12-18 months. Last year many home buyers who made enough monthly to support a mortgage just were not able to save the amount needed for the downpayment and closing costs that came along with buying a home. This year however, many of these same buyers haven’t spend anywhere near as much as they normally would which has enabled them to add to their savings account and with a renewed focus on finding a place of their own, and with consumer confidence in California being higher than it was before Covid, they are now in a position to be able to afford the cost of buying a home and have the motivation to see it through.
What to Expect in July
and the Remainder of Summer
Buyers:
Good News: Inventory will continue to rise week after week giving you more options and less competition for your new home
Bad News: Appreciation as well as interest rates will also be rising as we go through Summer and transition into Fall. The longer you wait to get into the market, the higher home prices will be and the more you will be paying on your mortgage.
Sellers:
Good News: The market will be in your favor for the foreseeable future. If you price your home correctly the first time, you should receive a good amount of interest. Can you expect 15-20 offers? Probably not, but you should be able to get a good amount of traffic and interest when placing your home on the market
Bad News: Between now and the end of Summer (as well as into Fall) you will see demand slowly decrease, appreciation slow, and interest rates rise. If you are not planning on buying a new home with the money you make off your current homes sale you can probably wait a bit longer to get in on the market without too much of an issue. However, if you are trying to buy a new home after selling your current place, you really have to watch interest rates carefully, as a slight shift up will more dramatically impact your next monthly mortgage payment compared to the extra 1% extra appreciation you might get by waiting to sell. If you are thinking of buying and selling at the same time, now is a good time to take advantage of the low rates and rising inventory on the buying side and the still very high demand on the selling side.
