It's been a wild October in the housing market, interest rates are driving the market as well as the headlines in the news. The media is making it sound like the sky is falling and another 2008 is just around the corner, but is it? As always, let's look at the ACTUAL data in Orange County so you can have some clarity among all the chaos. In this monthly update we are going to look at:
1) What supply and demand are doing
2) What interest rates are doing as well as when and why they might go down
3) What does all this mean for the housing market in OC for the remainder of the year
4) My best advice for both buyers and sellers in TODAY'S market
This is my longest newsletter of the month so if you would rather watch my latest video going over all of this instead of reading, click the video above!
We currently have about 3,677 homes on the market in Orange County and have been sitting at that number, give or take a few dozen for the last 6 weeks. We aren't seeing the normal decline that we typically see during this time of year. However without context I'm sure this number doesn't mean much to you so let's give it some.
When looking at the average inventory for this time of year during the three years leading up to covid (2017-2019) we are usually sitting at about 6,000 homes right now so we are currently about 55-65% below where we need to be to get us back on track(at this moment 63% actually). On top of that, during mid September we typically see inventory start to drop by a little over a percent a week leading up to the beginning of November but this year it really hasn't budged. So our inventory is currently historically low but doesn't seem to be dropping like it usually does. It's important to note however that we also aren't seeing a giant rise in inventory either. So for anyone reading headlines of inventory spiking, that might be happening in some markets in the US but not here. Real estate is local so make sure if you are reading articles about the housing market it's from around the area you are actually living or plan on living in.
Demand has dropped by 31% since the beginning of September. In a typical year we usually see demand drop as we head into Fall but usually between September 1st and November 1st we only see it drop by about 11%. When looking at the 3 year average in demand for this time of year pre-covid(2017-2019) we are sitting at a demand level 72% lower than average. So why has demand fallen off a cliff? It all comes down to 1 reason, the fastest spike in mortgage interest rates over a single year ever on record.
So with demand falling so significantly, prices of homes should be plummeting right? So why aren't they?
The media likes to focus on two things right now, demand for homes being WAY down, and the number of transactions in the housing market also being significantly down. But most of these articles fail to mention the other two important parts of the housing market.
1) Home sale deceleration does not mean depreciation. Yes sales have dropped by over 30% compared to last year, however just because sales are down, it doesn't mean prices are also falling 30%. It simple means there are less transactions taking place. You also have to remember that last Fall was one of the busiest Fall markets we have ever seen in real estate so when we compare the two numbers there is going to be a dramatic difference and expect that difference to become even larger in the coming months so when the headlines come out you are prepared for it.
2) Yes demand is very low right now but so is supply. Demand, again 72% lower than a traditional year is being met with extremely low supply, currently 63% lower than a typical year. With demand being slightly lower than supply, Econ 101 would tell you to expect prices to stabilize or slightly decrease. This is exactly what is happening. Home values in most areas of OC have peaked for the moment, and are starting to fall, however because of that small difference in supply and demand, they are only SLIGHTLY decreasing. This also is supported by one of the top indicators of what the market is doing which is the average time it takes to get a home into escrow. Over the last month it has gone from 77 in Orange County to 87 today. This might seem like a lot but if you look back at 2007 when the housing crash was starting the average days on market was over a year! So those expecting to see prices crash, are going to be disappointed.
This is really the biggest story right now as interest rates have taken over and are basically dictating supply and demand. As rates have gone up less buyers want to purchase, and at the same time it becomes less appealing for sellers to sell and give up their low rate they locked in over the last two years. The higher they go, the more stubborn the market gets and the more transactions drop. So when will these interest rates start to go back down? This is one of the biggest and hardest questions to answer right now but from the general consensus of most economist we will see rates start to go back down once we see some meaningful decreases in inflation. When inflation goes down, interest rates will follow in almost all cases.
When will inflation go down?
Again, no one really is able to predict this but based on what economists are currently saying we probably won't see this happen until at least quarter two or three of next year.
When inflation does goes down, how far will interest rates fall?
Again, it's impossible to predict the exact amount however two of the things that will have some of the biggest impact on how far they end up dropping will be:
1) How long it takes to see a meaningful downturn in inflation
2) How much job loss happens before inflation starts going down
The longer it takes to get inflation under control the more likely it will be that we see a deeper recession on the back end due to higher prices and lost jobs. The more pain and job loss we see, the more likely the fed will miss it’s soft landing and will eventually have to swing the other way and reduce rates further than they expect to pull us out of the recession. This would likely cause mortgage rates to take a more dramatic dip.
However, if we see inflation start to get better before there is too much job loss and they can slow the rate increases on time or faster than expected, then I don’t think we will see as large of a swing downwards on rates.
Using data from the last 6 recession, the average mortgage interest rates has dropped by 1.8% from the peak to the end of the recession(and often kept dropping after the recession was declared over). So I don’t think it’s that unrealistic to say at some point in the coming 24 months there will be a good chance we will see rates back in the 5s again. We could even get into the 4s by the end if the recession hits harder than expected. Will we ever see rates in the 2-3 again? I think the probability is low, but in today’s highly volatile interest rates environment, you can’t really rule anything out.
There is no denying that in terms of affordability, this is one of the toughest markets buyers have ever seen. Home prices and interest rates are making it difficult for the majority of buyers to afford the cost of a mortgage payment which has more than doubled in the last 18 months and although we are starting to see home prices fall slightly, at the current rate the decrease is just not really enough for most buyers to notice a significant difference in their monthly mortgage payments. By far, interest rates are going to be the determining factor on how affordable a home is and for the rest of the year, it's really hard to see any way that rates will fall in any significant way. This unfortunately means that some buyers will just have to sit on the sidelines and hope for rates to fall.
However, for those who can afford the payments, this next 6 months will most likely be one of the best times to buy a home as they will have more leverage over the seller than anytime in recent history. Buyers are now able to take their time looking for the perfect home, don't have to rush, can often place offers slightly lower than the last comparable sale, negotiate great terms in their purchase contract, and in many cases actually ask the buyer to pay for some of your expenses like closing costs and money to buy down your interest rate to something more affordable.
If you are on the fence about buying you ultimately need to ask yourself:
1) Do I plan on being in this home for over 5 years?
2) Can I comfortably afford the mortgage payments?
3) Can I get into the location I want and find a home with the amenities I want for that payment?
If the answer is yes to these three questions, then really short term ups and downs in the market really should not have a significant impact on your home buying decision. You should be focused on that predictable fixed payment over the next 30 years.
Now you might be saying to yourself, well if home prices are falling, even slightly, shouldn't I wait until early next year to buy instead?
Currently the odds of you being able to purchase your home for slightly less money early next year are high, however if you are already currently on the edge of being able to comfortable afford the type of home you want, you have to understand that rates have a much larger impact on your overall monthly payment compared to home prices. If you buy a home for 3% less than it's worth right now but rates go up there is a good chance you'll end up spending more on that mortgage even if the home price is slightly lower. Also, right now there are deals happening out there where you are getting homes below market value so you could find a home and secure it for that low price today and not have to wait for the market to drop further. So again, it really all goes back to your goal, are you trying speculate and time the market, or are you trying to buy a house for you and your family to call home for the foreseeable future? If it's the latter, again you really want to focus on what you can afford today and look at it as what it is, a long term investment.
Want to know how to get an interest rate at low as 3% on your next home? CLICK HERE
Also, are you thinking of buying your first home in 2023 and want to be walked through the whole process from budgeting, loans, showings, offers, escrow, and what to expect in the housing market in the next 6-12 months? IF so I will be hosting a FREE webinar in November that goes over all these topics and more so if you are open minded to learning about the home buying process so when the time comes to buy your first home you know exactly what to expect and are one step ahead of every other buyer out there just REPLY TO THIS EMAIL WITH THE WORD "INTERESTED" and I'll keep you updated as the date and time get finalized in the upcoming weeks.
If you are debating putting your home on the market now or waiting until after the holidays, just know that the current data and trends are not your friend. You will almost certainly get less money at the beginning of next year than you would by getting it on the market right now. Yes, it's slower during the holiday season, however you need to remember we live in So Cal. While other parts of the country are dealing with snow, mud, ice and freezing temps that no-one wants to go out in, our winters here are one of the reasons prices are always higher. Having to put on jeans and a jacket and maybe dealing with a small rain storm every few weeks is really the extent of bad weather we get. So yes, it slows down, but real estate deals are happening everyday of every week during the Fall and Winter. If you price your home correctly and and have a great marketing plan, your home WILL sell.
If you are thinking of selling, when you interview agents one of the things you need to pay most attention to is how they plan on marketing your home. If they come in saying they will take professional photos, send out fliers, and host open houses, kindly show them the door. To successfully sell in today's market, you need an agent with an actual marketing plan for your unique home. Some of the very basics it should have are:
1) Professional photos
2) Professional video tour
3) 3D scan of the home
4) Floor plan uploaded of the home
5) Matterport virtual walk through of the home
6) Marketing materials send out to the entire neighborhood
7) Targeted ads for your home running on: Youtube, Facebook, Instagram, Google, TikTok
8) Mega Open Houses
If the agent can't walk you through all this and more, you are going to have a hard time getting your home not only sold, but for a great price as well.
Want a FREE market analysis of your home with no pressure to sell? I'll review what your home is currently worth, what you would net from the sale, and give you up-to-date housing market info on your specific neighborhood. Contact me by phone (714-366-2186) or e-mail JoshAlexanderRealEstate@gmail.com for the free home equity analysis now!