First-time home buyers are not only getting squeezed by higher mortgage rates, there are also fewer homes coming on the market in the entry-level price ranges.
The Tale of Two Markets
There is a definitive difference between starter homes and the rest of the orange county housing market.
For several years, there has been a wave of millennials turning 32, the prime first-time home buyer age. They have been getting married and having babies and now want to own a home. Unfortunately, with higher mortgage rates and higher home prices, many have been unable or unwilling to purchase. For nearly two years, since rates spiked, they have been sitting on the sidelines, waiting for either home values to plunge or mortgage rates to drop. Yet, neither has occurred. Instead, there has been a standoff between buyers and sellers, and with a limited inventory of available homes, sellers have had the edge.
In taking a careful look under the hood, the upper ranges, anything above $1 million, has had a lot more activity than last year. There are more homes coming on the market and more closed sales. Yet, for starter homes, anything below $1 million, it is an entirely different story. There are not as many homes coming on the market, and there are far fewer closings. There is a noticeable squeeze on the starter home market.
The data illustrates the stark differences between starter homes and the rest of the market. In 2024, through March, an extra 613 homes were placed on the market, 11% more compared to 2023. Yet, there were 8% fewer, or 211 missing FOR-SALE signs below $1 million. On the other hand, 29% morehomes were placed on the market above $1 million, or an extra 824 signs. The entry-level market is already suffering from a chronically low supply. There is plenty of buyer competition due to the scarcity of available homes. As a result of the limited inventory of starter homes, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) for all homes below $1 million is a scorching 29 days.
Homeowners are “hunkering down” in their homes and are unwilling to move due to their current underlying, locked-in, low fixed-rate mortgage. Through March, 37% fewer homes are on the market compared to the 3-year average before COVID (2017 to 2019). Starter homeowners are even more inclined to stay put compared to homeowners in the higher price ranges. Many cannot afford to sell their homes and trade their low rates for today’s 7.4% mortgage rate. It simply does not make economic sense. According to the Federal Housing Finance Agency’s National Mortgage Database, 84% of Californians with a mortgage have a 5% or lower rate, 67% are at 4% or lower, and 30% are at 3% or lower.
Mortgage rates have been bobbing around 7% for most of the year. With the recent sticky Consumer Price Index (CPI) inflation report and other hotter-than-expected economic reports, rates spiked to 7.44% as of April 15th. Last year, in mid-April, mortgage rates were around 6.5%, nearly a whole percentage point lower. Even with today’s higher mortgage rate environment, there have been an extra 187 closed sales, 4% more, this year compared to 2023. Yet, there were 1,941 closed sales below $1 million this year compared to 2,282 last year, 15% less or 341 fewer closed sales. Above $1 million, every price range has experienced more closed sales. There were 2,449 this year compared to 1,924 last year, 27% more, or 528 extra sales.
The entry level will improve once mortgage rates eventually ease to the mid-6s. Many economic experts believe the U.S. economy will cool sometime this year. Rates drop with a cooling economy. If the economy downshifts enough, rates could fall to the low 6s or even into the upper 5s. The lower mortgage rates fall, the more inclined homeowners will be to move. It will also result in a spike in demand. With more homes available and more demand, the housing market would begin to thaw.
Yet, the U.S. has proven to be extremely resilient thanks to the strong consumer. The economy has exceeded expectations despite the high-interest rate environment since the start of last year. With recent economic reports, the anticipated cooldown does not look like it will appear during the first half of 2024. Only time will tell. The Federal Reserve has been very data-dependent. Future economic reports will pave the path for the entire housing market, especially in the lower price ranges.
With more FOR-SALE signs above $1 million, there are more choices, pending sales, and activity compared to the lower price points. There is a squeeze on starter homes in Orange County, and lower mortgage rates are the only eventual cure.
Active Listings
The active inventory climbed by 9% in the past couple of weeks.
The active listing inventory increased by 174 homes in the past two weeks, up 9%, and now sits at 2,184. It was the largest rise of the year and the first time that there were more homes compared to the prior year since last April. During the Spring Market, supply and demand typically rise at similar paces. Yet, not as many homeowners are placing their homes on the market due to their underlying low fixed-rate mortgage payments. The spike in inventory may have more to do with the recent spike in mortgage rates. Rates have remained stubbornly above 7% for most of April and even climbed to nearly 7.5% today with hotter-than-expected economic news. Demand downshifts a bit when rates rise, allowing the inventory to climb. The inventory will continue to climb if rates remain above 7% with duration.
Last year, the inventory was 2,053 homes, 6% lower, or 131 fewer. The 3-year average before COVID (2017 through 2019) was 5,780, an additional 3,596 homes, or 165% more, more than double the current level.
Homeowners continue to “hunker down” in their homes, unwilling to move due to their current underlying, locked-in, low fixed-rate mortgage. For March, 2,285 new sellers entered the market in Orange County, 1,623 fewer than the 3-year average before COVID (2017 to 2019), 42% less. Last March, there were 2,136 new sellers, 7% fewer than this year. A few more sellers are opting to sell compared to the previous year.
Demand
Demand increased by 2% in the past couple of weeks.
Demand, a snapshot of the number of new pending sales over the prior month, increased from 1,617 to 1,642 in the past couple of weeks, up 25 pending sales, or 2%, its highest level since May. As rates climb, the buyer pool shrinks due to affordability issues, and many buyers are getting priced out of the home buying process. Demand continues to bounce along a bottom, similar to last year. It will eventually jump higher once mortgage rates ease, projected to occur sometime this year. Recent economic trends push that off to later in the year. Until then, expect demand to continue to bump along a trajectory that is very similar to last year.
Last year, demand was 1,663, 1% more than today, or 21 extra pending sales. The 3-year average before COVID (2017 to 2019) was 2,777 pending sales, 69% more than today, or an additional 1,135.
With supply rising faster than demand, the Expected Market Time (the number of days it takes to sell all Orange County listings at the current buying pace) has increased from 37 to 40 days in the past couple of weeks. Last year, it was 37 days, similar to today. The 3-year average before COVID was 62 days, 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 755 to 787 homes, up 32 or 4%. Luxury demand decreased by ten pending sales, down 4%, and now sits at 254. With supply rising and demand falling, the Expected Market Time for luxury homes priced above $2 million increased from 86 to 93 days. Even at 93 days, the luxury market is still very hot. The recent slowdown may have more to do with April's equity market volatility.
Year over year, the active luxury inventory is up by 150 homes or 24%, and luxury demand is up by 64 pending sales or 34%. Last year’s Expected Market Time was 101 days, slightly slower than today.
In the past two weeks, the expected market time for homes priced between $2 million and $4 million increased from 60 to 64 days. For homes priced between $4 million and $6 million, the Expected Market Time increased from 109 to 138 days. For homes priced above $6 million, the Expected Market Time increased from 238 to 247 days. At 247 days, a seller would be looking at placing their home into escrow around December 2024.
Orange County Housing Summary
· The active listing inventory in the past couple of weeks increased by 174 homes, up 9%, and now sits at 2,184. There are more homes on the market than the prior year for the first time since last April. In March, 42% fewer homes came on the market compared to the 3-year average before COVID (2017 to 2019), 1,623 less. 149 more sellers came on the market this March compared to 2023. Last year, there were 2,053 homes on the market, 131 fewer homes, or 6% less. The 3-year average before COVID (2017 to 2019) was 5,780, or 165% extra, more than double.
· Demand, the number of pending sales over the prior month, increased by 25 pending sales in the past two weeks, up 2%, and now totals 1,642. Last year, there were 1,663 pending sales, 1% more than today. The 3-year average before COVID (2017 to 2019) was 2,777, or 69% more.
· With supply rising faster than demand, the Expected Market Time, the number of days to sell all Orange County listings at the current buying pace, increased from 37 to 40 days in the past couple of weeks. It was 37 days last year, similar to today. The 3-year average before COVID (2017 to 2019) was 62 days, slower than today.
· The Expected Market Time for homes priced below $750,000 increased from 30 to 33 days. This range represents 19% of the active inventory and 23% of demand.
· The Expected Market Time for homes priced between $750,000 and $1 million remained unchanged at 24 days. This range represents 13% of the active inventory and 22% of demand.
· The Expected Market Time for homes priced between $1 million and $1.25 million increased from 24 to 26 days. This range represents 10% of the active inventory and 15% of demand.
· The Expected Market Time for homes priced between $1.25 million and $1.5 million increased from 29 to 34 days. This range represents 11% of the active inventory and 12% of demand.
· The Expected Market Time for homes priced between $1.5 million and $2 million increased from 35 to 36 days. This range represents 11% of the active inventory and 13% of demand.
· In the past two weeks, the expected market time for homes priced between $2 million and $4 million increased from 60 to 64 days. For homes priced between $4 million and $6 million, the Expected Market Time increased from 109 to 138 days. For homes priced above $6 million, the Expected Market Time increased from 238 to 247 days.
· The luxury end, all homes above $2 million, account for 36% of the inventory and 15% of demand.
· Distressed homes, both short sales and foreclosures combined, comprised only 0.2% of all listings and 0.2% of demand. Only four foreclosures and one short sale are available today in Orange County, with five total distressed homes on the active market, up two from two weeks ago. Last year, ten distressed homes were on the market, similar to today.
· There were 1,785 closed residential resales in March, nearly identical to March 2023’s 1,791, and up 41% from February 2024. The sales-to-list price ratio was 100.4% for Orange County. Foreclosures accounted for 0.1% of all closed sales, and short sales accounted for 0.1%. That means that 99.8% of all sales were good ol’ fashioned sellers with equity.
