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Despite mortgage rates eclipsing 7%, there are very few available homes, multiple offers are the norm, and home values are on the rise.
Many potential buyers are sitting on the sidelines, waiting for the market to become more affordable. Combining high home values and significantly higher mortgage rates, the expectation was for home values to plunge. Home affordability has collapsed due to rates rising from 3.25% in January 2022 to 7% today. Purchasing a home is out of reach for so many Americans. The logic is simple: either incomes rise substantially, interest rates significantly fall, or home values tumble. They believe that the only proper solution is for home values to collapse.
Yet, the housing market has proven to be exceedingly resilient despite higher rates and low home affordability. Incomes have not suddenly spiked, mortgage rates have not plunged, and home values have risen year over year. Housing has played out much differently than expected. Buyers new to the housing arena are shocked to find tremendous competition. Jam-packed open houses, multiple offer bidding wars, and sales prices at or above the asking prices are the norm, especially in the lower price ranges.
Lower rates will result in an immediate boost in the number of buyers looking to purchase. Affordability will drastically improve. Demand readings will improve virtually overnight. Eventually, as rates drop, the number of homeowners willing to sell will increase. But remember, 85% of all California homeowners with a mortgage are enjoying a fixed rate at or below 5%. Not everyone will be inclined to trade their low rates for a higher one. The dramatic increase in demand will outpace the number of additional homeowners willing to sell. As a result of this mismatch, the housing market will get even hotter, the number of multiple offers will increase, bidding wars will get more fierce, and home values will rise.
It was true a year ago, and it is true today: The time is now. Buyers who wait will face increased competition, and purchasing a home will become even more challenging.
What we know:
→ Homes that are updated or have unique features are selling quickly
→ Homes that having objections or are priced too high are sitting longer
→ Active inventory is still low, down 11% from last year
→ Demand is up slightly but still the lowest since 2004, and down 64% since pre-COVID
What we can expect:
→ Inventory will creep up as we head into the Spring market
→ Buyers who wait on the sidelines will face increased competition when rates drop
→ Buyers expect upgrades to justify higher price points, but are willing to move fast
Orange County Housing Market Summary:
- The active listing inventory in the past couple of weeks increased by 53 homes, up 3%, and now sits at 1,992. It is the second-lowest mid-February reading since tracking began in 2004, only behind 2022. In February, 38% fewer homes came on the market compared to the 3-year average before COVID (2017 to 2019), 1,178 less. 199 more sellers came on the market this February compared to 2023. Last year, there were 2,218 homes on the market, 226 more homes, or 11% higher. The 3-year average before COVID (2017 to 2019) was 5,119, or 157% extra, more than double.
- Demand, the number of pending sales over the prior month, increased by 79 pending sales in the past two weeks, up 6%, and now totals 1,476, the lowest end-of-February reading since tracking began. Last year, there were 1,505 pending sales, 2% more than today. The 3-year average before COVID (2017 to 2019) was 2,422, or 64% more.
- With demand rising faster than the rise in supply, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, decreased from 42 to 40 days in the past couple of weeks. It was 44 days last year, similar to today. The 3-year average before COVID (2017 to 2019) was 64 days, slower than today.
- For homes priced below $750,000, the Expected Market Time increased from 33 to 35 days. This range represents 21% of the active inventory and 25% of demand.
- For homes priced between $750,000 and $1 million, the Expected Market Time decreased from 25 to 22 days. This range represents 12% of the active inventory and 22% of demand.
- For homes priced between $1 million and $1.25 million, the Expected Market Time decreased from 31 to 29 days. This range represents 10% of the active inventory and 13% of demand.
- For homes priced between $1.25 million and $1.5 million, the Expected Market Time increased from 35 to 38 days. This range represents 10% of the active inventory and 11% of demand.
- For homes priced between $1.5 million and $2 million, the Expected Market Time decreased from 44 to 39 days. This range represents 12% of the active inventory and 12% of demand.
- For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks decreased from 63 to 58 days. For homes priced between $4 million and $6 million, the Expected Market Time decreased from 136 to 97 days. For homes priced above $6 million, the Expected Market Time increased from 240 to 269 days. At 269 days, a seller would be looking at placing their home into escrow around November 2024.
- The luxury end, all homes above $2 million, account for 35% of the inventory and 17% of demand.
- Distressed homes, both short sales and foreclosures combined, comprised only 0.3% of all listings and 0.3% of demand. Only three foreclosures and two short sales are available today in Orange County, with five total distressed homes on the active market, down two from two weeks ago. Last year, eight distressed homes were on the market, similar to today.