Today’s real estate market is rapidly shifting. The market experienced a historic runup following the Covid-19 pandemic and subsequent changes to homebuyers’ consumption patterns. As quickly as it started, the market has now ceased up due to runaway inflation and the Fed’s commitment to cooling the economy. Although the housing market is chronically undersupplied, demand is anemic due to economic uncertainty, rate hikes, and a potential recession. Even qualified buyers are in wait-and-see mode. Based on many attention-grabbing headlines, one would think home prices are in free fall, much like what we saw during the Great Financial Crisis (“GFC”). It can be difficult to decipher click-bait from reliable economic data on the housing market. I am writing this short piece to help potential Orange County homebuyers navigate this unique time and separate fact from hyperbole.
So, what is actually going on in Orange County residential real estate? We are seeing a rapid shift from an imbalanced sellers’ market to a buyers’ market.
Multiple statistics show a weakening resale market. The days on market (“DOM”) is the time it takes for a home to sell after being listed. This stat is used as a proxy for market velocity, i.e., the speed and quantity a resale transacts. DOM has increased steadily since halfway through 2022, which shows slowing demand. Relatedly, inventory levels are increasing. Since the beginning of 2022, the number of homes listed has increased four times. This means more choices for buyers and more competition for sellers. Perhaps most importantly, buyer sentiment is at all-time lows. Whether or not this is the case, most people believe now is a bad time to buy. This is a self-fulfilling prophecy because if most people think home values are going to decrease – they will.
One would be remiss by not mentioning affordability concerns. Simply put, the cost to own a home has more than doubled since rates increased from 3% to ~7%. Coupled with the elevated home prices since 2020, these interest rate hikes are testing the limits of what buyers can afford to buy. Entry-level buyers especially are being priced out of the market.
There are bright spots showing the resiliency of the resale market. It’s not all doom and gloom. Orange County is still inventory constrained, despite the increase in the latter half of the year. And although price appreciation has flattened – and we are seeing some moderate declines – the majority of homeowners now have record levels of equity in their homes. In addition, lending standards after the GFC tightened, so those who purchased homes during this cycle are not at risk of default. If you are waiting for foreclosures and distressed sales that produced severe price declines during the last downturn, don’t hold your breath.
It’s hard to know what to do with all the noise. Buying a home often cannot be timed perfectly in the cycle. Life circumstances are unpredictable, and sometimes the right time for you is not the perfect time in the market. This should not dissuade serious buyers. As long as you plan to live in the home for a few years and you can comfortably afford the payments, do not over think it.
But here are some strategies for buyers who still need a home:
- The era of irrational exuberance and bidding wars is over. Sellers do not have all the leverage. If a home has been sitting on the market for a few weeks, there should be room to negotiate. You don’t even have to waive any contingencies. The competition is less fierce for buyers, which is a welcome change.
- Ask your lender about adjustable-rate mortgages (“ARMs”) and 2/1 buydowns. This product is a great way to reduce your monthly payment, while waiting for interest rates to moderate. Of course, there is no guarantee of when rates will come down, so be sure to do your own due diligence. But we have seen these products work very well for many of our clients.
- Cash buyers are king. If you are in a situation where you can close in cash, use your advantage. Many are struggling to qualify at these new rates, and sellers know this. A guaranteed cash close is great leverage for beneficial terms and prices. As the Oracle of Omaha – Warren Buffet – once said, “be fearful when others are greedy and greedy when others are fearful.”
- National homebuilders are in more distress than homeowners. Their business model requires them to move units. Standing inventory is bad for business. Many (all) are offering generous incentives and price reductions on year-end closings. Take advantage of the free money.
If you are interested in selling your homes, I only have one piece of advice - price it right. The market is not nearly as hot as even a few months ago. If you overprice your home, it will sit on the market. If it sits on the market, you will have to reduce the price and buyers will know you do not have the upper hand.
The news about today’s market can be misleading or downright inaccurate. Certainly, it is important to work with an agent that has boots-on-the-ground experience with buyers and sellers. Davis Osgood Group’s real estate consultants are experts in their field and can help you navigate these volatile times in the real estate market. Please feel free to reach out. We look forward to working with you.
This is not financial advice. The content on our website is formed from our personal experiences and opinions. Do your own due diligence and consult with trusted tax, finance, and legal professionals when making decisions.
