Real Estate Economic Update by Gary Watts, Real Estate Economist

The following was taken from OC Realtor, August 2014 which is a summary of his presentation at the OCAR Annual Membership Meeting.

When asked what makes a good sermon, a wise preacher replied, "Start off good, finish strong - and the two should be as close together as possible."  I am going to try to do exactly that.

This year, almost everyone is asking questions about the direction of real estate.  Sellers want to know where all the buyers are.  Buyers what to know if home prices have peaked.  Real estate professionals want to know what happened to inventory.  Lenders wonder when loan volume will return.  And, people everywhere ask me, "what the heck is going on with our market?"

Recessions aren't new.  During the 1970s, we had the oil crisis.  In the 1980s it was the savings and loan scandal.  And, more recently, we had the global financial crisis of 2007 - 2008.  Real estate responds to recession by going through cycles, and these cycles have distinct phases.  The first phase of a real estate cycle begins immediately after a recession, and this phase can last from 18 to 24 months.  During this phase, residential home sales boom.

In the later part of 2011, home price declines began to level off, and the word on the street was that real estate prices had finally "hit bottom."  After nearly five years of stock market declines, large and small investors began pulling massive amounts of money out of the market and investing in residential real estate, something Warren Buffet had advised them to do.  And long-term fence-sitters finally got back into the housing market by deciding to sell and then buy to move up or down or sideways.

Phase I lasted 23 months, from early Fall 2011 to the summer of 2013.  During that time, Orange County home prices rose more than 40 percent, and investors were responsible for one-third of the sales.  For comparison, in 2011, Orange County home sales totaled 29,425.  In 2012, sales reached 34,380; and in 2013, home sales rose to 37,574.

In the fourth quarter of 2013, Phase I came to an end.  After seven consecutive months of gains, home sales began to decline.  In fact, they declined 13 percent from the summer quarter and 4 percent from the fourth quarter of 2012.  Also, the MLS numbers showed a decline in sales of 3.4 percent from 2012, and Orange County's listing inventory had only 5,000 homes on the market by year's end.

During this period, the only positive news in the housing resale market came from properties valued at $1 million and above: 14 percent of all sales in the fourth quarter were million-dollar homes.  But even though home sales declined, home prices continued to rise.  Single-family resale home prices were up 21.2 percent, while resale condo prices were up 22 percent from a year earlier.

Now that Phase I has officially ended, the big questions are what comes next, how long will it last, and why is it happening like this.

One explanation for what is happening is first-time buyers.  First-time buyers are what make the real estate market go, and we are not getting enough of them.  As of June 1, resale homes were down 21 percent from the first six months of last year and resale condos were down 22.4 percent.

A second explanation is movement - or the lack of it.  The homes from Irvine south are more than forty years old, and there is less mobility in this area.  folks in these homes bought them a long time ago, paid off their mortgages, and are staying put to enjoy what they worked so long and hard to own.

A third explanation is that the focus has shifted to new homes.  Historically, they have not been a big competitor of ours, but they are up 88 percent from where they were in 2012 and are up 18.1 percent this year from the first six months of last year.  There are fifty new developments from Irvine south.  New home sales represented 14 percent of all home sales in the fourth quarter of 2013 and have definitely affected the single-family resale market.

Forecast
My forecast is that Phase 2, which usually lasts about a year, will persist through 2014.  Listing inventory will start dissipating in August.  Sales are going to decline at least 10 percent this year.  Interest rates are going to rise, probably by a quarter to a half of a percent.  Home prices will appreciate about 7 percent.  Lending will put a buffer on our sales, and new home sales will continue to increase.

The Good News
And now for that strong finish.  The good news is that Orange County ranks second in the nation in the speed and degree of its real estate recovery.  Orange County had the fastest decline in listing inventory in the United States.  Only 4.4 percent of homeowners are under water.  Orange County home prices are only 6 percent below their 2007 peak.