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Orange County Housing Report

Anticipation Pricing… GONE!

By Steven Thomas

Quantitative Economics and Decision Sciences, B.A.

September, 13, 2015

For sellers, it is time to recalibrate the Orange County housing market expectation.

Anticipation Pricing: stretching the price in anticipation of getting more than the last sale has come to an end now that housing has reached the Autumn Market.

The Orange County housing market was extremely hot this year from mid-February through May. The expected market time (the amount of time it would take to place a home into escrow) dropped to below two months. Detached homes below $500,000 dropped to less than a month. The low expected market time paved the way for sellers to adopt an aggressive pricing strategy, Anticipation Pricing.

Anticipation Pricing is when a seller looks at the most recent sales and then speculates how much more they can obtain. This stretching of the price results in appreciation. The hotter the market, the more a seller is able to stretch. It has enabled homeowners to achieve the highest sale in a neighborhood. Often one home closes at a height not seen since prior to the Great Recession and then the very next home to enter escrow sales for even more.

Sellers get away with Anticipation Pricing not because of Irish luck or that their stars aligned; it is because of simple economic dynamics. When supply drops to anemic levels and demand skyrockets, market forces prevail and prices jump. The scarcity of housing coupled with buyers tripping over each other to cash in on their dream homes allows sellers to obtain more money (and sometimes a lot more money) than the last closed sale.

It has been a seller’s market all year long, but it differs in its intensity. When the expected market time drops below one month, fasten your seat belt, it is a market that is scorching hot. Appreciation soars, buyers compete to purchase a home, and Open Houses are crowded like the souvenir shop on Main Street at Disneyland. From one to two months, the market is still on fire, but prices are not quite escalating as fast. From two to three months, where the Orange County housing market currently sits, while it is still a seller’s market, housing is only appreciating slightly. It’s not a bidding war for homes, and buyers are quite a bit more price cautious, not wanting to pay much more than the Fair Market Value for a home.

The expected market time has climbed to 2.66 months, its highest level since January of this year. It will remain pretty close to this level for the remainder of the year. With only slight appreciation, sellers can no longer get away with Anticipation Pricing. Many sellers will not listen to their REALTORS®, the experts in the field, in fear that they could be walking away from obtaining more at closing. Instead, they will remember the banter from earlier in the year, during the Spring and Summer Markets, where homes were able to fetch more than the last sale. There is so much information available online that describes the housing market. Remember, what is happening nationally does not always translate to what is happening locally. Also, prior month closed sales and median price levels are a reflection of homes that were placed into escrow a month or two earlier. So, in the coming week when we hear about August closed sales, those sales were placed into escrow in June and July, smack dab in the middle of the Summer Market, far different than today’s housing scene with muted demand.

In ignoring the experts, the Anticipation Pricing strategy in today’s market will only result in another overpriced home. These overpriced homes will not sell; instead, in the coming weeks or months, these sellers will have to decide to either reduce their asking price back down to reality or throw in the towel and pull their homes off of the market. The smart sellers will recalibrate their expectations and take advantage of the next six weeks, still a great time to sell before we make our way into the Holiday Market, the slowest time of the year to sell a home.

Let’s not get too greedy. Look at how far we have come from the lows of the Great Recession. Since 2012, the Orange County housing market has climbed and clawed its way back to a much healthier place. Distressed sales are just a blip on the radar screen. Values are approaching their pre-recession levels. Homeowners are sitting on a lot more equity. Sellers really should be counting their blessings and pricing their homes at their Fair Market Values.

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Active Inventory: After peaking in August, the active listing inventory has continued its descent. The active inventory peaked two weeks ago and will now shed homes continuously for the remainder of the year. It will be at a slow pace, but the trend is down. In the past two weeks, the active inventory dropped by 138 homes, a 2% drop, and now sits at 7,040. Coming off of an inventory peak is part of the normal housing cycle as we dive into the Autumn Market; with kids now in school, it is no longer the most favorable time of the year to make a move.

Last year at this time the inventory totaled 7,818 homes, 778 more than today, with an expected market time of 3.28 months, or 98 days. That’s 18 additional days compared to today.

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Demand: Demand decreased by 3% in the past couple of weeks. Demand, the number of new pending sales over the prior month, decreased by 77 homes in the past two weeks and now totals 2,645 homes. The pace of demand has downshifted to mid-February levels. We can expect demand to drop slightly in pace with the drop in the active listing inventory. With both dropping at close to the same velocity, the expected market time will not change much. Buyers who are waiting for a deal will not find one and sellers reaching for the stars will not find success.

Last year at this time there were 259 fewer pending sales, totaling 2,386.

Distressed Breakdown: The distressed inventory increased by 13 home in the past couple of weeks. The distressed inventory, foreclosures and short sales combined, increased by 13 homes in the past two weeks, a 6% climb, and now totals 232. In the past couple of months, it has been swinging up and down, dropping 21 and then increasing by 24. For proper comparison, it has been as high as 267 in mid-January, 35 more than today, and as low as 178 at the start of May, 54 fewer than today. A year ago, the distressed inventory was at 311 foreclosures and short sales, 79 more than the current mark. The bottom line, the trend is for very few distressed homes within the Orange County marketplace. These recent ups and downs may seem like wild swings, but today’s totals pale in comparison to prior years. Back in January of 2011, the distressed inventory peaked at 4,123.

In the month of August, only 2% of all closed sales were short sales, 1% were foreclosures, leaving 97% that were good ol’ fashioned non-distressed homeowners with equity.

In the past two weeks, the foreclosure inventory increased by 9 homes and now totals 73. Only 1% of the total active inventory is a foreclosure. The expected market time for foreclosures is 64 days. The short sale inventory increased by 4 homes in the past two weeks and now totals 159. The expected market time is 54 days. Short sales represent just 2% of the total active inventory. Have a great week. Sincerely, Steven Thomas Quantitative Economics and Decision Sciences Cell 949.874.8221

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