MANY BUYERS ARE LOOKING FOR A DEAL OR WAITING FOR THE HOUSING MARKET TO CRASH BEFORE THEY PURCHASE, BUT THAT IS NOT GOING TO HAPPEN ANYTIME ON THE HORIZON.
The looming recession has buyers on the edge of their seats fully aware that the housing market has slowed considerably. From the flood of online news articles describing the real estate slowdown to the countless YouTube and TikTok videos detailing in only a few minutes how housing is about to crash, many buyers are convinced that the Orange County housing market is on the brink of collapse. Homes are taking a lot longer to sell. The number of price reductions has surged higher in the past couple of months. As a result, many buyers sit on the sidelines waiting for prices to plunge. They are waiting for a deal, a total bargain.
Just because so many people are jumping to the conclusion that home values must plummet does not make it so. Merely mention a recession and everyone’s collective minds recall the devastating blow to housing during the Great Recession. Instead, homeowners across the country purchased their homes with huge down payments, extremely strong credit scores, money in the bank, and qualified for their mortgages. Buyers over the past many years have not been purchasing homes utilizing subprime loans, pick-a-payment plans, teaser rate adjustable mortgages, or zero down programs. This is not 2005 to 2008 all over again.
Instead, with an Expected Market Time (the time between hammering in the FOR-SALE sign to opening escrow) of 67 days, it is a Slight Seller’s Market (between 60 and 90 days). It is not a Balanced Market (between 90 and 120 days). It is not a Buyer’s Market (over 120 days). The market still lines up in favor of sellers. In fact, in the past two weeks, the Expected Market Time dropped from 72 to 67 days. Surprisingly, the Orange County housing market got a little hotter. It appears as if this year’s rise in market time has stopped and will remain a Slight Seller’s Market for the remainder of the year. This is due to the active inventory nearing its 2022 peak, rising by only 28 homes in the past couple of weeks, and demand jumping by 7% with rates falling to levels last seen in April.
The issue is that everyone had grown accustomed to two years of an auction-like atmosphere where there were only a limited number of homes available and an ocean of buyers willing to purchase, prompted by historically low mortgage rates. Open houses were flooded with potential buyers. It was not uncommon for homes to procure 20 or 30 offers in just days after coming on the market. Sales prices soared above their purchase prices. The trajectory was up, up, up, and up. That market was extremely unique and home values rose nationally at a record pace. Flash forward to today and the housing market is distinctly different.
Most homes are not selling instantly. Busy intersections are now adorned with weekend Open House signs. It is not uncommon to see the same home open for several weeks in a row. Price reductions are quite common in today’s market. There are fewer multiple offer situations, and most homes are selling below their asking prices. This is a “normal” market. The issue is that nobody has experienced a normal market in several years. It is hard to recall when housing was just ordinary.
An astounding 39% of the active inventory has reduced their asking price at least once. Many believe that price reductions are indicative of a buyer’s market where prices are falling. That is just not the case. Given today’s 67-day Expected Market Time, the price adjustments reveal the considerable number of homeowners who simply overpriced and did not cautiously approach pricing. When the Expected Market Time drops below 40-days as it did between August 2020 and May of this year, sellers got away with stretching their asking prices. Many real estate professionals scratched their heads in disbelief as their sellers picked arbitrary prices much higher than what was suggested by the professional, yet they still were able to obtain multiple offers and sell above their inflated asking prices. That market is now in the past. Arbitrarily pricing a home and stretching the asking price above the last comparable sale will result in limited activity and the need to readjust pricing.
Many sellers are pricing their homes in line with a sale from earlier this year when there was nothing available and buyers paid way over the asking price. This occurred even while mortgage rates climbed from 3.25% at the start of this year to over 5% in May (according to Mortgage News Daily). The problem was that there was nearly nothing available to purchase and plenty of buyers ready to pounce on anything new that hit the market. On January 1st there were only 954 homes available, a record low compared to the 3-year average reading prior to COVID (2017 to 2019) of 4,665. Eager buyers who had written offer after offer with no success were willing to do whatever it took to finally purchase, including paying way over the asking price, often $50,000, $75,000, or even $100,000 plus over the list price. The underlying, changing mortgage rate environment did not justify these extremely high sales prices, yet it occurred, nonetheless. This was a frothy stage of this year’s market.
Sellers who price their homes according to these frothy comps are finding that they are not able to sell. While a home may have closed for a top dollar record price in one neighborhood, there are often adjacent neighborhoods with comparable properties that did not experience a frothy sale this year and have homes available to purchase for far less. Buyers shopping around will notice the disparity in pricing and will opt to purchase the cheaper homes.
It is a Slight Seller’s Market. That means that sellers still get to call more of the shots, but homes are not selling instantly, and home values are no longer soaring higher. In order to find success, sellers must carefully consider the most recent pending and closed sales and take into consideration the location, condition, upgrades, and amenities. While it may have been a place they called “home” for years, buyers do not have that emotional tie and will instead rely on the Fair Market Value based on comparable properties. With today’s higher interest rate environment, they do not want to overpay.
Buyers must understand that the market is still not lining up in their favor. Yes, Orange County housing has slowed. They no longer have to make an instantaneous decision. They no longer are competing with a busload of other offers to purchase. They no longer need to write offers tens of thousands of dollars above the asking price. Yet, the market is still hot enough that they are not going to get a “deal” or buy a home at a “bargain” price. Values are not dropping. Instead, it is finally a normal market.
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