MANY ARE JUMPING TO EXTREME CONCLUSIONS ABOUT THE IMPACT OF HIGHER RATES, HIGH INFLATION, AND A POTENTIAL RECESSION ON THE HOUSING MARKET.
In housing, during a slowdown, demand falls, the active inventory rises, and it takes longer to sell a home. During the Great Recession there was a glut of homes available to purchase and it was matched up with muted demand. Consequently, home values plunged. In Southern California there were nearly 120,000 homes available in 2007 compared to the 19,000 homes available today, over six times more. Today’s missing ingredient that would lead to falling home values is supply. The number of homes on the market today is far below averages prior the start of the pandemic when values were still rising, but at a much more methodical pace.
The Orange County supply is at 2,452, a sharp rise from the 994 homes on January 1st, but still far below the 3-year average prior to COVID (2017 to 2019) for this time of year of 6,255. That is 155% more than today, more than double. Even with a 348-home climb, or 17% rise, in the past couple of weeks, it is still off by 3,803 homes. That’s a lot to make up just to get back to more normal levels. Keep in mind that the inventory levels since 2012 have been remarkably muted compared to the Great Recession and it has become even more pronounced each year.
With swiftly rising mortgage rates so far this year, demand, the prior 30-days of pending sales activity, began to slide after reaching an early peak on March 31st, when it normally rises. After initially dropping slightly, demand has stabilized and rose in the past couple of weeks by 25 pending sales. It now sits at 2,179, which is still 21% lower than the 3-year average prior the COVID, and 30% lower than last year at this time. But it is not going to plunge from here. The housing market has already digested 5% plus rates and there are still plenty of buyers looking to purchase at these higher rates. The recent rise is indicating that demand has indeed become more stable and has found its footing.
As the inventory rises and demand remains stable, the Expected Market Time will continue to slowly rise. It will remain a Seller’s Market this year, but it will take longer for sellers to find success, especially as the year progresses. Sellers will no longer get away with overpricing their homes. To find success, sellers will have to carefully arrive at their asking prices, taking into consideration the most recent comparable pending and closed sales.
The sky is not falling. Instead, housing is in the midst of transitioning from an insane, unhealthy velocity to a much more normal, methodical, “steady as she goes” pace.
