By now, the fact that today’s
mortgage rates are at historical lows is old news. Although lending rules have
tightened in recent years, for buyers who do qualify for financing one could
assume it’s a great time to be in the market to buy a home. In truth, it IS a
good time to buy, however people shopping for Orange County real estate are
seeing the impact of unprecedented market pressures that have made home buying
today a challenge.
ECONOMICS 101: Supply & Demand
The laws of Supply & Demand affect virtually
every type of goods or service you can imagine. The main thing to remember is
this: Shortage = Higher Price, Surplus = Lower Price; High Demand = Higher
Price; Low Demand = Lower Price.
In Orange County real
estate, we’re experiencing a supply and demand “Double Whammy”: both a
shortage in the supply of and an increased demand for homes in the area. The resulting higher prices buyers are willing
to pay and the combined slim pickings are making it much tougher for typical
buyers to find a home they can afford. What’s more, additional outside
pressures are driving up home prices further.
LOWER SUPPLY
So what brought all this
about? First, there are fewer short sales on the market compared with last year
to compete for buyers’ attention. Last
week, real estate industry analyst DataQuick
released March
numbers for California, showing that short sales continue to decline, as do
foreclosures, suggesting a healthier economy with fewer people in financial
distress.
Second, many potential
sellers are sitting on the sidelines waiting to see how far prices will
increase, hoping to eventually maximize their profits. While that’s an
understandable strategy, they run the risk of timing it wrong and missing their
opportunity.
Case in point: in recent years there have been fewer new
homes on the market in north Orange County because of both limited sites and
home builders waiting for the market to improve. That time may be upon us as we
are already seeing activity with new construction sites in Yorba Linda and
Brea. This additional inventory means more competition for existing home sales,
and more competition can mean lower prices.
HIGHER DEMAND & CASH SALES
Another factor driving up
home prices is the undeniable fact that Orange County is a great place to live and people want to buy here to enjoy the
lifestyle. But there’s more: Recent changes in lending laws that have
made it more difficult for some buyers to acquire financing leave them with
cash as the only way of competing with a bid on a home. That can end up
excluding a lot of first-time buyers. Historically, the majority of cash buyers
have been retirees or others who are ready to down-size and have cash in hand
from the sale of a larger family home.
Another group of cash
players on the rise in Orange County are investors and foreign buyers who see
this real estate market as a good place to park their liquid assets. Home
values have been rising at a rate that offers these buyers a better return than
they can find on other investments.
What’s more, cash buyers
can pay whatever a seller asks because cash transactions side-step the
appraisal process required in bank-financed purchases. Banks won’t loan money
for a purchase that is too far above their predetermined market value limits. Appraisals
serve to protect lenders and keep home prices from fluctuating wildly. Unrestricted
cash sales eventually influence neighborhood prices and are factored into the
analysis of comparable sales that banks use to set those upper limits on loans.
HOW FAR WILL IT GO?
With over two decades of
Orange County real estate experience, I can tell you that today’s market
conditions are NOT the norm. And while most experts would agree that it’s a
seller’s market right now in Orange County, one thing we can all count on is for
the market to eventually change. Low interest rates will not stay low forever, and
real estate investors may one day take a hard look at their rental properties,
deciding to liquidate them in search of higher returns elsewhere. Supply goes
up, price goes down, and the pendulum swings to back to the buyer’s corner.
For DataQuick’s 2012 overview of Orange County individual zip
code performance, click
here.
Feel free to contact me if you have questions about buying
or selling your home in Orange County!
714-924-0781
DRE #0143577
