OC HOUSING REPORT: LOWER RANGES FADING AWAY

OC HOUSING REPORT: LOWER RANGES FADING AWAY

  • Patrick Loyd
  • 08/23/23

Lower Ranges Fading Away 

The lower, entry-level price ranges have been slowly disappearing with far fewer closed sales and homeowners choosing not to sell their homes.

 

Entry Level Changes

There were an astonishing 57% fewer closed sales and 65% fewer FOR-SALE signs below $1 million this year compared to before COVID. 

Thanks to inflation, everyone is paying a lot more for just about everything. From 2019, pre-pandemic, to today, a loaf of bread has increased by 55%. Milk has risen by 31%, ground beef by 34%, and potato chips and a 2-liter soda have soared by 48%. Used cars are up 41%. A Big Mac was priced at $3.79 in 2019 compared to $5.17 today. Wallets have been squeezed. While the inflation rate may be cooling, higher prices are here to stay.

Housing is no exception. According to Freddie Mac’s Home Price Index, since the summer of 2019, the Los Angeles/Orange County metro has increased by 40%. As home prices climbed, what was considered the entry-level to homeownership slowly diminished over time.

Looking at 2013 helps illustrate how the goalposts have been moved for the lower ranges. In 2013, 48% of all closed sales were below $500,000, and 4,928 were detached. In 2019, only 23% were below $500,000, and 404 were detached. In 2023 through July, it sank to 9%, and 23 were detached. Buyers today do not expect to secure a detached home for less than half a million dollars. That price point has faded away.

The data illustrates just how severe the shortage of lower-range homes has become. In 2023, through July, 77% fewer homes were placed on the market below $500,000 compared to the 3-year average before COVID. There were 74% fewer between $500,000 and $750,000. From $750,000 to $1 million, 40% fewer homeowners opted to sell. In total, below $1 million, there have been 12,404 missing FOR-SALE signs. Overall, in Orange County, 44% fewer homes have been placed on the market. Yet above $1 million, there were 16% more sellers, an extra 1,054. Due to fewer sellers in the lower ranges, the active listing inventory has plunged to unprecedented ultra-low levels, 2,434 homes, the lowest readings since tracking began in 2004.

The high-interest rate environment and the lack of available homes to purchase have sharply impacted closed sales in Orange County this year. Since the Great Recession, it has been one of the weakest years in terms of closed units (not values). Sales were down 33% compared to the 3-year average before the pandemic, 5,730 fewer. Homes below $500,000 were off by 75%, and homes from $500,000 to $750,000 were off by 66%. From $750,000 to $1 million, it was off by 20%. Yet, the number of closed sales above $1 million is eye-opening. There were 60% more closed sales above $1 million, an extra 2,150. All price ranges above $1 million experienced at least 50% additional closed sales. Above $4 million, ultra-luxury, it was nearly double the number of sales, up 93%.

More sales in the higher ranges and fewer sales in the lower ranges demonstrate how rising home values have impacted the Orange County housing market. More and more homes have appreciated above and beyond $1 million. Before COVID, 79% of all closed sales were below $1 million. In 2023 it dropped to 51%. Before the pandemic, below $500,000 accounted for 23% of sales, and the $1 million to $1.5 million range accounted for 9%. Today, only 12% of sales are below $500,000, and 27% are from $1 million to $1.5 million.  

The erosion of home affordability has gone on for years. This trend will continue as long as the inventory remains severely limited, allowing home values to grow despite today’s sky-high mortgage rate environment.

For buyers anticipating more homes in the affordable price ranges coming on the market soon, it is simply not in the cards. The number of opportunities diminishes over time. Buyers who wait will be confronted with fewer available options to purchase. More and more homes are surpassing the $1 million threshold. In 2013, there were 12,075 detached single-family home sales below $750,000, 66% of all detached closed sales, compared to 6,753 in 2019, or 37%. There have only been 374, or 5% of all closings through July of this year.

The lack of homes available in the lower ranges combined with fewer homes placed on the market has resulted in extremely hot market times for all homes priced below $1 million. The Expected Market Time, the time between initially listing a home to accepting a contract, is at 31 days, insanely hot. At 31 days, most homes acquire plenty of attention with throngs of showings, multiple offers, and sales prices at or above their asking prices. It is challenging to isolate a home in the entry-level price ranges today. Yet, as homes continue to appreciate, it will only become more challenging in the future since the lower ranges are slowly fading away.

 

Active Listings

The active inventory decreased by 41 homes in the past couple of weeks.

The active listing inventory decreased by 41 homes in the past two weeks, down 2%, and now sits at 2,434 homes, its largest drop since April. It is at its lowest mid-August level since tracking began in 2004, even below inadequate 2021 lows. Somehow the active inventory has still not surpassed the initial January levels, which is far from normal. It typically rises from January until it peaks sometime during the summer. In addition, the inventory may have reached a peak a couple of weeks ago at 2,475 homes. Only time will tell. The inventory may climb a bit further if demand weakens due to the recent spike in mortgage rates. The inventory will slowly decline through the Autumn market if a peak was reached. From Thanksgiving to the New Year, it will plunge.

Last year, the inventory was 4030, 66% higher, or 1,596 more. The 3-year average before COVID (2017 through 2019) is 6,723, an additional 4,289 homes, or 176% extra, nearly triple where it stands today. 

Homeowners continue to “hunker down” in their homes, unwilling to move due to their current underlying, locked-in, low fixed-rate mortgage. For July, 2,257 new sellers entered the market in Orange County, 1,450 fewer than the 3-year average before COVID (2017 to 2019), 39% less. These missing signs counter any potential rise in the inventory.

Demand

Demand was nearly unchanged in the past couple of weeks.

Demand, a snapshot of the number of new pending sales over the prior month, decreased from 1,580 to 1,576 in the past couple of weeks, down four pending sales, nearly unchanged. Demand has been flat all year long and has not changed much from month to month. It rose to 1,567 in mid-March. It then slowly climbed to its peak in April at 1,706. Since then, it has only dropped by 130 pending sales to 1,576. Now that school has started, the housing market transitions to the Autumn Market when demand slowly diminishes through mid-November. It could drop a bit faster as the housing market absorbs even higher rates. According to Mortgage News Daily, mortgage rates climbed to 7.48% today, its highest level since November 2000. It was at 7% a month ago.

Last year, demand was at 1,849, 17% more than today, or an extra 273. The 3-year average before COVID (2017 to 2019) was 2,574 pending sales, 63% more than today, or an additional 998.

With supply falling slightly and demand unchanged, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) decreased from 47 to 46 days in the past couple of weeks. Last year the Expected Market Time was 65 days, much slower than today. The 3-year average before COVID was 79 days, significantly slower than today.

 

Luxury End

The luxury market slowed in the past couple of weeks.  

In the past couple of weeks, the luxury inventory of homes priced above $2 million increased from 793 to 794 homes, down one, nearly unchanged. Luxury demand decreased by 20 pending sales, down 9%, and now sits at 196. With supply unchanged and demand falling, the Expected Market Time for luxury homes priced above $2 million increased from 110 to 122 days. Luxury is much slower than the lower ranges, necessitating a careful, methodical approach to pricing to sell successfully.

Year over year, luxury demand is down by 13 pending sales or 6%, and the active luxury listing inventory is down by 26 homes or 3%. Last year’s Expected Market Time was 118 days, similar to today.

 

For homes priced between $2 million and $4 million, the Expected Market Time in the past two weeks increased from 76 to 82 days. For homes priced between $4 million and $6 million, the Expected Market Time increased from 152 to 177 days. For homes priced above $6 million, the Expected Market Time increased from 291 to 378 days. At 378 days, a seller would be looking at placing their home into escrow around September 2024.

 

Orange County Housing Summary

  • The active listing inventory in the past couple of weeks decrease by 41 homes, down 2%, and now sits at 2,434, its largest drop since April. The inventory may have peaked a couple of weeks ago. It is the lowest mid-August level since tracking began in 2004. In July, 39% fewer homes came on the market compared to the 3-year average before COVID (2017 to 2019), 1,450 less. Last year, there were 4,030 homes on the market, 1,596 more homes, or 66% higher. The 3-year average before COVID (2017 to 2019) was 6,723, or 176% more, nearly triple.
  • Demand, the number of pending sales over the prior month, decreased by four pending sales in the past two weeks, nearly unchanged, and now totals 1,849, the lowest mid-August level since tracking began in 2004. Last year, there were 1,849 pending sales, 17% more than today. The 3-year average before COVID (2017 to 2019) was 2,574, or 63% more.
  • With supply falling slightly and demand unchanged, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, decreased from 47 to 46 days in the past couple of weeks. It was 65 days last year, much slower than today.
  • For homes priced below $750,000, the Expected Market Time decreased from 34 to 32 days. This range represents 19% of the active inventory and 27% of demand.
  • For homes priced between $750,000 and $1 million, the Expected Market Time remained unchanged at 31 days. This range represents 15% of the active inventory and 23% of demand.
  • For homes priced between $1 million to $1.25 million, the Expected Market Time remained unchanged at 33 days. This range represents 10% of the active inventory and 14% of demand.
  • For homes priced between $1.25 million to $1.5 million, the Expected Market Time decreased from 44 to 40 days. This range represents 11% of the active inventory and 12% of demand.
  • For homes priced between $1.5 million to $2 million, the Expected Market Time remained unchanged at 53 days. This range represents 13% 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 increased from 76 to 82 days. For homes priced between $4 million and $6 million, the Expected Market Time increased from 152 to 177 days. For homes priced above $6 million, the Expected Market Time increased from 291 to 378 days.
  • The luxury end, all homes above $2 million, account for 32% of the inventory and 13% 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 four short sales are available today in Orange County, with seven total distressed homes on the active market, unchanged from two weeks ago. Last year there were seven distressed homes on the market, identical to today.
  • There were 1,784 closed residential resales in July, 9% less than July 2022’s 1,959 closed sales. July marked a 10% drop compared to June 2023. The sales-to-list price ratio was 100.3% for all of Orange County. Foreclosures accounted for 0.2% of all closed sales, and there were no short sales. That means that 99.8% of all sales were good ol’ fashioned sellers with equity.

 

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