Bears do not wake up from hibernation energetic and raring to go. Instead, they are groggy and dazed for two to three weeks and it takes a while for their metabolism to kick in again. That is how housing normally starts after the holidays have finally passed. It takes a few weeks in January for buyers and potential sellers to shake off the holiday fog after enjoying the festive season that is chock-full of so many wonderful distractions. This is when the housing market slowly awakens and starts to thaw. It is coming out of hibernation and will be quite sluggish to start the New Year. 


The issue is that housing has not had a normal, slow start to the year since 2020. In both 2021 and 2022, the market was insanely hot from day one, plagued with very few homes available and insatiable demand due to an extremely low mortgage rate environment. Buyers were tripping over each other to purchase every single home that came on the market, multiple offers were the norm, homes sold way above their asking prices, and the housing market felt like an out-of-control train where it was very challenging for buyers to secure a home.



In looking at the details, the about-face in housing is due to sky-high mortgage rates coupled with a tremendous run-up in home values. In both 2021 and 2022, mortgage rates experienced back-to-back record low starts to the year at 2.65% and 3.22%. Today’s 6.14% is the highest start to a year since January 2008. As a result, demand, a snapshot of the last 30 days of pending sales activity, is at its lowest level to begin a year since tracking began in 2004 at 900 pending sales. It is slightly lower than demand level in 2008.


Housing was manipulated by the policies of the Federal Reserve during the pandemic years with their $1.3 trillion purchase of mortgage-backed securities (MBS) and bringing the Federal Funds Rate (short-term rates) down to 0%. Basically, they acted like the secondary market and bought loans from banks so that lending would not collapse during COVID-19. Consequently, mortgage rates fell to record lows and buyer demand skyrocketed. Unfortunately, with heightened demand and many homeowners opting to not place their homes on the market while there was still a pandemic, the active listing inventory dropped to record lows. With heightened demand and a low supply of available homes, the Expected Market Time, the time between pounding in the FOR-SALE sign to opening escrow, dropped to record low levels, 42 days in 2021 and 25 days in 2022. 



Today, the inventory might be at the second lowest level to start a year, even beating 2021, but when it is combined with record low demand, the Expected Market Time is no longer at insane levels. Instead, it is like 2016 through 2018 and 2020 with a market time of 84 days. At 84 days the market is not instant. It may not be as slow as 2014, 2015, and 2019, but the few buyers that do remain in the system are not tripping over each other to purchase. They are taking their time, unwilling to stretch above the asking price, and carefully arriving at a price that they are willing to pay for a home based on its condition, location, upgrades, amenities, and age. 



The Orange County housing market will thaw and improve from here. More homeowners will opt to sell, and the active inventory will rise. Buyer demand will increase as well with the holidays in the rearview mirror, it always does regardless of the pace of the market. Further fueling an increase in demand is that mortgage rates have dropped from over 7.25% in October and November to just above 6% today. Expect home values to continue to fall until mortgage rates drop to 5.5% or below. The direction of the housing market is predicated on the direction of mortgage rates and home affordability. As rates drop, affordability will eventually improve enough to instigate more demand. Mortgage rates will slowly fall as inflation gradually comes back down to earth. This is a process that does not occur instantly and just as it took a while to rise to its current level, it will take a while to substantively drop. 



WARNING TO SELLERS: If you are holding out for the Spring Market in anticipation of a quick sale and a price higher than the last comparable sale, that simply will not happen. Instead, sellers will be looking at a much more sluggish market with muted demand and buyers taking their time to purchase. Proper pricing is crucial to find success. 


WARNING TO BUYERS: While home values may be falling right now, lowball offers are a waste of everybody’s time including your own. Distressed sellers, foreclosures, and short sales are NOT components of today’s market. There is a real lack of panic selling. Most sellers do not have to sell, so there will not be major “deals” like there were during the Great Recession. 


Interested in finding out how the market is fairing in your community? Want to know what your home is worth? Thinking of moving but don't know where to start?


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{Market Update courtesy of Steven Thomas, Reports on Housing}