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Happy New Year! Now, what does that mean for Orange County real estate? First, let us look back at what happened in 2022 in terms of inventory, demand, luxury properties, and the Expected Market Time.
The year started off with an active inventory of 954 homes, the lowest level to start a year since tracking began in 2004. The average start prior to the pandemic was 4,500 homes, so there was nearly nothing available in January. Yet, with a rapidly rising mortgage rate environment, demand slowed substantially as the year progressed. After starting 2022 at 3.25%, rates eventually surpassed 5% in May and eclipsed 6% in June. As a result, the inventory rapidly grew from mid-April until it peaked at the beginning of August at 4,069 homes, a rise of 327% from January 1st. The 3-year average peak prior to COVID was 6,959 homes, 71% higher than this year. From August through year’s end, the number of available homes decreased to 2,642, very similar to 2020 levels and 41% below the 3-year average end to December of 4,479.
The inventory would have dropped even more during the Autumn market, but rates eclipsed 7% in October and took an even larger bite out of demand. Many sellers stagnated on the market without success. That changed during the holidays as rates dropped into the lower 6’s, and the inventory dropped by 939 homes in the last 6 weeks of the year, down 26%. The inventory is poised to drop below 2,500 upon ringing in a New Year, still not enough available homes to purchase.
The inventory crisis continues, not because of excess demand, but due to homeowners opting to “Hunker Down.”
Orange County Housing Market Summary:
- Active Inventory – the year will begin with less than 2,500 homes, the second lowest start to a year since tracking began in 2004. Only the start of 2022 was lower, 62% less. Prior to COVID, the average start was 4,420, with 77% more available homes to purchase. The inventory crisis will continue. Expect the inventory to rise on the back of diminished demand, only to be hampered by the “Hunkering Down” effect where homeowners opt to stay in their homes due to their underlying low mortgage rates. More homes will enter the fray once mortgage rates drop below 5.5%, most likely sometime in mid-2023. Expect the active inventory to peak around August eclipsing 5,500 homes, well below the over 7,000 home peak average prior to COVID.
- Demand – due to the persistent high mortgage rate environment, buyer demand will continue to be muted. With less competition and pressure on affordability, buyers will be extremely cautious and unwilling to stretch above the asking price. They will be looking very carefully at price; so, expect home values to drop between 6.5 to 8.5% for the year. There is a strong potential for mortgage rates to dip below 5.5% by the summer due to the combination of a slowing economy and falling inflation. With lower rates, demand will strengthen along with affordability. The combination of lower rates and lower home prices will prompt this rise in pending sales activity.
- Housing Cycle - the housing market will follow a normal housing cycle. The strongest demand coupled with the highest levels of new sellers 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 decrease by 6.5 to 8% compared to 2022, with around 22,900 (the lowest sales volume since 2007).
- Luxury Market – luxury housing will be sluggish and will continue to transition to normal, longer market times, often taking months to procure a sale. The Spring Market will be the strongest for luxury and will become a bit more sluggish and susceptible to Wall Street volatility during the second half of the year.
- Interest Rates – look for mortgage rates to start around 6.5% and slowly, but methodically drop as the economy slows, and inflation gradually eases. As the United States economy slips into a recession, expect rates to fall to below 5.5% and may even fall to below 5% by year’s end. If mortgage rates recede to these levels, housing will stabilize, and home values will stop their decline.
- Distressed Inventory – do not expect a wave of foreclosures. The number of active forbearances has dwindled to very low levels. Of the over 7.8 million forbearance exits, 91% are either performing monthly or paid off their loans. Only 1% are in active foreclosure, less than 100,000 across the United States, and the current delinquency rate is at its lowest level in decades. Expect slightly more distressed sales in 2023 as there are some homeowners who will be susceptible to an economic downturn. Nonetheless, the total numbers will be very low and undetectable in the broader housing market.