HAPPY NEW YEAR! Now, what does that mean for Orange County real estate?
First, let us look back at what happened in 2020 in terms of the inventory, demand, luxury properties, and the Expected Market Time.
After starting the year with a record low number of available homes to purchase, the inventory did not increase like it typically does, and ultimately plunged to new record lows.
COVID-19 suppressed the inventory in Orange County in 2020, but this year the lack of homes available to purchase sidelined many homeowners contemplating making a move. They did not want to participate in a market fraught with tremendous competition, multiple offers, and purchase prices way above their asking prices. From January through November, there were 7% fewer homes placed on the market compared to the 3-year average prior to COVID (2017 to 2019), 2,517 fewer. Including 2020, there were 5,129 missing FOR-SALE signs. That may not seem like a lot, but every single missing sign just magnifies the inventory crisis.
The “supply problem” that everybody talks about is due to heightened buyer demand fueled by historically low mortgage rates matched with an inventory that was already trending lower prior to COVID. The inventory crisis is so acute that it has limited the number of closed sales in Orange County. There is plenty of excess demand from buyers unable to isolate a home to purchase.
Even though home values have far surpassed 2007 record levels, homes are still much more affordable due to record low interest rates and much higher household incomes. After 16 record breaking new lows in 2020, the start of January 2021 was greeted with a 17th record low, 2.65%, according to Freddie Mac’s weekly Primary Mortgage Market Survey®. Rates climbed to 3.18% by March, but then dropped. They have bounced between 2.77% to 3.14% since. Even at this year’s 3.18% height, it would still be a record in comparing it to any time prior to the start of the pandemic in March 2020. As of December 23rd, rates were at 3.05%. This low-rate environment continues to instigate tremendous buyer demand despite rising home values. Household incomes have been methodically rising over time, which will most likely surpass $100,000 in Orange County this year, rising 38% since 2007. The current low-rate environment, coupled with higher incomes, continues to entice a flood of buyers to pursue the purchase of a home.
It has been an unprecedented year for the luxury market. Market times dropped to a Hot Seller’s Market level in March, a first for luxury since tracking began. It has remained hot through year’s end. As of the end of December, luxury demand is up year-over-year by 10 pending sales or 4%, and the active luxury listing inventory is down by 571 homes or 57%. Similar to the overall housing market, the luxury inventory is starved for homes and buyers looking to purchase are eagerly waiting for additional homes to hit the market.
2022 Forecast: Another hot year for housing
The shock of going into a pandemic may have disrupted the housing market in 2020 for a few months, but there was no disruption in 2021. Demand surged despite COVID’s winter wave, summer delta wave, and the current omicron wave. If anything, it has kept a lid on mortgage rates. The only thing that will slow the speeding housing freight train at this point is rising rates; yet, as long as COVID continues to be a threat, rates will have a hard time rising much from their current record lows. Housing is one of the strongest sectors of the economy, yet the overall U.S. economy has been on the mend as well. Retail sales have soared. Unemployment has dropped substantially. Job openings are surging. The number of homeowners in forbearance dropped below 600,000 by the end of December, and the vast majority of the nearly 7 million exits are either performing or paid off their mortgages in full. The economy has dramatically improved. Inflation may have risen to highs not seen in decades, but mortgage rates have not budged, indicating that investors are confident that the inflation pressures will subside and eventually retract sometime in 2022. The low interest rate environment will continue and will be a tailwind that will continue to fuel the incredible run on housing. As a result, the local housing market is going to be HOT in 2022. Here is the forecast:
- Active Inventory – the year will begin with less than 1,000 homes, the lowest start by far since tracking began in 2004. It will be 60% less than the 2,522 start to 2021, the prior record low. With very few available homes to purchase, housing will be extremely hot on January 1. The theme for 2022 will be the same as 2021, not enough homes for buyers to purchase. Instead, they will all be in escrow. Expect the active inventory to peak around August eclipsing 5,000 homes, well below the over 7,000 home peak prior to COVID.
- Demand – with an anemic inventory and the historically low mortgage rate environment, buyer demand will be extremely strong from the start of the year through the Summer Market. With tremendous buyer competition, buyers will be willing to stretch above the asking price; so, expect appreciation around 8 to 10% for the year. Demand will be at its strongest, and most appreciation will occur from January through July, and then will downshift during the Autumn and Holiday Markets.
- 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 decrease 3 to 6% compared to 2021, with around 33,500 (2021 had the most sales since 2005).
- Luxury Market – luxury housing will continue to be exceptionally hot, yet sales will drop slightly from 2021’s record year. The Spring Market will be the strongest for luxury and will become a bit more sluggish with more Wall Street volatility during the second half of the year.
- Interest Rates – look for mortgage rates to continue to remain at historically low levels until the pandemic improves dramatically, most likely during the second half of the year. Yet, rates will have a hard time surpassing 3.5%. Even with Federal Reserve reversing their MBS (mortgage-backed securities) purchases and raising the Federal Funds Rate (short term rates), and heightened inflation, long term mortgage rates will continue to bounce between 2.75% to 3.5%. If mortgage rates remain at these low levels, housing will be insane.
- Distressed Inventory – do not expect a wave of foreclosures. The number of active forbearances will dwindle to nearly none. As home values have surged, very few homeowners are under water, which is one of the main reasons the vast majority of forbearance exits are either performing on a monthly basis or paid off their loans. The foreclosure moratorium resulted in very few foreclosures in 2021, so expect slightly more in 2022. Nonetheless, the total numbers will be very low and undetectable in the broader housing market.
The bottom line: 2022 will continue where housing in 2021 left off, INSANELY HOT. It will be an Insane Seller’s Market (an Expected Market Time below 40-days) from the start of the year through the Summer Market. Multiple offers and bidding wars will be the norm for homes priced below $2 million. Once again, the market will heavily favor sellers and buyers will have to pack their patience to isolate their piece of the American Dream and take advantage of record low mortgage rates. From mid-August on, the beginning of the Autumn Market, housing will evolve into a Hot Seller’s Market (an Expected Market Time between 40 and 60 days) with a bit less activity, not quite as many multiple offers, and fewer homes selling above their asking prices.
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