December 2006

I saw the Borat movie the other day and I couldn’t help but use that ‘NOT’ phrase…  There has been lots of talk in the past 12 months about a real estate Bubble here in Orange County CA… As a professional real estate Broker I don’t see it, but then again, maybe I’m just biased.  So let’s take a look at the current statistical analysis to shed some light on the current state of the real estate market here in Orange County.

First set of statistics that I look at, that are often quoted, is the Months of Inventory.  This figure is published by the major banks and title companies but the data is usually a 4 to 6 months behind the current market conditions and covers a very large area of the marketplace (ie: California).  So I started tracking my own version of the Months of Inventory back in July of 2002′.  The data I have been gathering is on a weekly basis for just the south Orange County real estate market.  Also, I use homes under contract (In Escrow) instead of homes that have sold and closed in the previous 3 months.  This makes for a much more time sensitive up-to-date barometer as to what is currently going on in our marketplace. In July of last year (2005′) we were in a super Hot Sellers market at 1.5 months of inventory.  Since that time the market has be slowing down to a level of 9 months of inventory about a month ago.  Recently the market has shown signs of gaining just a little bit of strength as the months of inventory has dropped back to 8 months.  Below is a Graph showing the Total number of homes Active for Sale versus the Total number of  Homes sold In Escrow.  The ratio of these two figures is representative of the Months of Inventory.   

Now lets examine the actual home prices which is actually a harder figure to quantify in real time.  Most banks and title companies quote year to year yearly averages of prices  which are obviously very dated.  So we utilized a much more time sensitive analysis.  First we limited our analysis to 5 cities in south Orange County CA. and we did not include the beach cities.  Then we eliminated any properties that have premium panoramic or ocean views.  Then we limited it to detached homes (SFR’s) from 1,800 to 2,500 square feet. In other words, we stuck to so called middle of the road homes.  Then we looked at the average price per square foot on a moving average basis spread over a 2 month period of time.  This is as sensitive as one can make it with regard to time, otherwise you start to get some wild gyrations.  We use the price per square foot since this is a more accurate representation of what home prices are actually doing.  Many buyers will buy smaller homes (which cost less then bigger homes) when they feel uneasy about the marketplace, so simply looking at average prices or median prices can skew the actual home price picture. Below is our tabulation of the Price per Square Foot from Feb of 2005′ to the Present for the cities and home filters mentioned above:

• Feb – April, 2005′     -  $344/sf
• May – July, 2005′      - $362/sf
• Aug – Sept, 2005′     – $367/sf
• Oct – Dec, 2005′      -  $371/sf
• Jan – March, 2006′   – $379/sf
• Feb – April , 2006′   – $386/sf
• March – May, 2006′ – $372/sf
• June – Aug, 2006′     – $362/sf
• Sept – Nov, 2006′    – $368/sf

As can be seen by the above table, actual sales prices peaked around February of this year as the market moved from a Neutral market to a Buyers market (greater then 6 months of inventory).  Since that time actual sales prices have dropped about 7% to 8% at present.  If the current trend of the months of inventory remaining flat and possibly trending a bit lower, I expect sales prices to drop possibly 4% more or stay at these current levels. Certainly not a ‘Bubble Bursting’ 

The conclusion is… YES, the market has slowed down to a Buyers Market…  YES, prices have dropped since early this year… but I don’t call this a Bubble Bursting, just a much needed and healthy market correction.  There are too many jobs, too many potential Buyers ’sitting on the fence’ waiting to buy, too little vacant land, not enough inventory of unsold homes, and super low interest rates….  These factors will prevent a so called real estate bubble from bursting. Unfortunately, these graphs and statistics cannot foretell the future.  My senses tell me that 2007′ will be a year that the market languishes about where it is today, and does go up nor down much from here… 2008′ it’s anybodies guess, but my educated guess is that we may see a little bit of appreciation (3% to 5%) in that year. 

What would I do if I was a potential Buyer ?  If I’m looking to buy and live in for the mid to long term, I would not worry about the market, for I’m very bullish about the long term appreciation potential of Orange County. I would keep my eyes open for a decent to good deal to buy. On the other hand, I would not be looking to do a Buy/Sell Flipper at this time.  Any Flipper investors who jumped in the market in the past 12 to 18 months are going to feel some pain…