Spring 2017 Orange County Market Forecast - Low Inventory to Drive Gains
This scene is familiar right before a major hurricane is scheduled to make landfall and shows the effects of an increase in demand and not enough supply to satisfy it. What happens to prices when there is nothing left on the shelves? Prices can get out of control. Orange County has continued its 5 year run where demand for housing far outpaces enough inventories to satisfy buyers. See the charts below to see how inventory of homes for sale in Orange County stack up to recent years and why this is foreshadowing a seller's market this spring. These conditions will likely fuel a drastic run up of prices, albeit at a much lower rate than we saw in 2012-2013 where values completely skyrocketed. At the start of 2017, this trend has continued with the housing stock in January were at the lowest levels since 2013 indicating a 4-5% increase may be in store this year.
So, this means that the bull market in housing prices in orange county, California is set to continue, but for how long and what happens when it ends?
To start with, equilibrium is achieved when the average annual housing inventory is just above 8,000. Last year, the average was 5,965 and the peak inventory was still under equilibrium as it topped out at 7,329, the market appreciated considerably with these conditions as a backdrop.
Since the real estate bear market in 2007-2008, low interest rates have allowed homeowners to remain where they are and instead remodel or add-on to their homes inexpensively. This trend will likely continue for some time as rising interest rates will also likely incentivize homeowners to stay put in their homes – selling their current home and buying a new home will exchange their low interest rate on their current loan with a much higher rate and larger mortgage payment on their new loan.
To understand how rising rates impact affordability, please refer to the chart below.
For the same payment of around $2,500 per month, a buyer could only afford a $542,400 home at 5.25%, whereas they could afford a $667,200 home when rates are at 3.5% A 1.75% change in rate, means that buying power is reduced significantly and that while prices coming down help buyers with respect to price, that their payments will likely not be impacted, whereas a seller is very much interested in selling before a significant rise in rates drastically impacts the equity in their home.
OUTLOOK FOR SELLERS:
Given that rates are still low and low housing inventory, buyers are out en masse. With homes at all-time highs and market conditions as favorable as they’ve ever been for selling, Now is the real sweet spot as you can sell and buy a new home with still historically low interest rates.
If you wait too long, it is possible that the window will close as once rates rise enough to seriously impact mortgage payments, buyers will struggle to afford loans to buy homes at these prices and demand could dry up. If this happens, inventory can once again poke up above 10,000 homes available for sale that we saw in the years immediately following the pullback in real estate prices in 2007 and 2008. Additional inventory, will lead to a buyers-market and will likely result in a flattening of the uptrend and possibly a pull-back with prices dropping and buyers expecting seller concessions in the form.
OUTLOOK FOR BUYERS:
Orange County is mostly infill, which means that there is not much empty land and there are limited possibilities for new construction to increase inventory. This, coupled with the desirability of orange county real estate, ensures while a small pullback might occur in prices, it will most likely be due to rising interest rates, which will mean that the effect on a buyer’s payment will not fluctuate much, even if prices were to fall.
If you are looking to make a move, even if not for a while, let’s talk. I’d like to show you how much your home is worth, help you plan ways to increase your homes value and salability prior to putting it on the market and I’d also like to share with you how our unique marketing methodologies will bring the most buyers and generate the highest sales price when you decide to sell. Conversely, If you are looking to buy, let our experience and cunning negotiating skills get you the best terms for your purchase!