Orange Count Market Update

The Impact of Low Rates!

The Orange County housing market is EXTREMELY HOT, and as the year unfolds the heat continues to crank higher and higher. The slower markets of 2018 and the first half of 2019 now seem like a distant mirage to most buyers. For a minute, buyers looked as if they were finally going to get a turn, but that all disappeared. In 2020 housing is sizzling hot again. To understand where this heightened demand and buyer’s exuberance is coming from it is necessary to consider where interest rates have historically been and their impact on affordability. The chart below highlights how higher interest rates limit the price of a home that a buyer can afford. In 1980, the average mortgage rate was 13.75%. For a desired monthly payment of $3,000 per month with 20% down, a buyer back then was looking at a $338,750 home. Rates continued to drop decade after decade. In 2000, the 8% mortgage allowed a buyer to look at purchasing a $511,250 home. It increased to a $602,500 home just prior to the Great Recession. Flash forward to today’s 3.5% mortgage rate and that buyer desiring a $3,000 per month payment is now looking at an $835,000 home.

Naysayers may quickly point out that the median sales price was much lower back in 1980, 1990, 2000, and 2010; however, taking into consideration both the median income and median price illustrates how buyers are able to afford so much more today. In 1980, the payment for the median priced home as a percentage of income was 55%. In 1990 it was 50%, and in 2000 it was 40%. Just prior to the Great Recession, the monthly mortgage payment was 59% of income. Today, the monthly payment based upon the average rate and median income is at 38%, the same as 2010. (For the full OC Housing Report please shoot me an email.)

Advice to Buyers: the low rate environment has significantly improved affordability and allows buyers to stretch their purchasing power to historically high levels. There is not enough emphasis on the importance of the payment of a home; instead, way too much weight is placed on the price. Advise to Sellers: do not read between the lines of the current hot market as an excuse to overprice. Just as in prior hot markets, many sellers will not find success simply because they stretch the asking price out of bounds. The Fair Market Value of a home is based upon its condition, upgrades, and location. Pricing at or very close to this value allows sellers to obtain the highest sales price.

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