The local residential real estate market here is south Orange County is soft, but I see signs that we may be approaching a bottom in pricing. Currently we are at about 8.5 months of inventory in Orange County, which is a solid Buyers Market (greater then 6 months is considered a buyers market). First, to clear some definitions. The Months of Inventory is not just the inventory of homes for sale, but is essentially a ratio of the number of homes for sale, divided by the rate at which homes have been currently selling. This is the true indication of the strength or weakness of any given real state market. If I said there were 20 homes for sale in Maryland, Ohio, one may get the impression that’s a tight market, but if you later learned that only one home sold in Maryland all of last year, you would soon learn that that is a terrible market for it would take about 20 years to sell the current inventory of homes for sale… As can be seen by the below graph, the south Orange County residential real estate market has been hovering around 8.5 months since about July of last year (2006′), which means that it would take about 8.5 months to sell the current inventory of homes for sale. Also of interest, the Months of Inventory dropped substantially early this year, and just after the sub-prime lending meltdown and the associated bad press, the Months of Inventory shot back up to around 8.5 months… the same level as last year.
Why hasn’t the Months of Inventory gotten a lot worse given all of the terrible doom and gloom bad press in the news for the past 10 months, you may ask ? No one knows for sure, but what I do know is there are lot of buyers (here locally and in other states) sitting on the fence, waiting for prices to drop here locally. And prices have already dropped significantly contrary to what the press has been reporting, and some of those buyers are jumping in and purchasing. Just last week several periodicals quoted DataQuick and other sources who were quoting that the number of sales were down substantially as compared to last year. This is true, which can be seen in the below graph of Active versus Pending homes for sale in Orange County. The sales volume (Pending) is down by about 35% compared to May of 2006′.
But here is were things get mis-leading. This same articles go on to report that prices were down only slightly (1.5%) compared to last year in Orange County, and also stated that Laguna Niguel home prices were up this year by about 14% over last year (Another article quoted prices up in Laguna Niguel in January year to date by 59% !!!!)… How can this be true when the Price per Square Foot graph below shows a 10% drop in home prices for south Orange County. Is somebody trying to twist the facts, or worse yet lie ? No, I don’t think so… one just needs to fully understand what they are analyzing, and what that data is telling them about the marketplace. When a major source such as DataQuick (or numerous other organizations) calculate prices, they usually calculate the Average (or Median) of prices over a large area. Unfortunately, this type of average for all types of homes can be misleading from one year to the next. Let’s say there were many more first time home buyers buying Condos in Laguna Niguel for around a price of $450,000 last year, and today, they are more buyers bargain shopping for larger detached homes in Laguna Niguel for around $775,000. You can easily see how then the average price could be up by 16% (or even 59% !!) over last year using this calculation… But the reality is that prices have dropped by a significant percentage.. What people really want to know is, is the home at 123 Main street in Mission Viejo worth more or less, and by approximately what amount, as compared to last year…
To overcome the above shortcomings of the large area Averages (or Medians) of Home Prices, we analyze prices using a different technique. First is we look at Price per Square Foot for detached homes only. The Price per Square foot is more accurate then the Average or Median since is incorporates the differences between larger and smaller homes. Also, we just look at detached homes and do not mix in Condos, which gives additional accuracy in our calculation of overall price movements. Finally, we picked three central south Orange County cities of Mission Viejo, Laguna Niguel and Aliso Viejo. Again, you get less accurate results if you average prices over a larger area.. For example, averaging the price of a property sold in Dana Point with a panoramic Ocean View, with the price of a 2 bedroom, 1 bath Condo in Rancho Santa Margarita does not tell you much. One may ask, if the results only look at the home prices of detached houses in these 3 cities, how do I know what has happened to prices of Condos in San Clemente? or the price of an Ocean view estate in Laguna Beach… Well the old saying of a “Rising Tide Raises (and lowers) All Ships” has always applied to Orange County real estate. Trust me, this technique is by far more accurate then quoting that prices have increased in Laguna Niguel by 16% (or even 59%) in the past year…
So when you use the above analysis technique and then smooth the date with a 3 month moving average to give some time sensitivity, you get the graph above. This shows that prices have dropped about 10% from the peak in pricing or around May of last year. And this data is congruent with my day to day buying and selling activities as a Broker here in south Orange County.
Am I worried about the market ? No, not at all… If you bought a home 16 months ago using Zero down, you may be experiencing some against… But when I start to worry is when I pick up the phone to call past buyer prospects from months ago, and I get many bad phone number messages stating they have moved to Texas/Ohio/Colorado etc. There are far to many local and out-of-state buyers watching the local market here in the OC, waiting for prices to fall. They have decreased by 10% already, and some of these buyers have jumped in, which is why the Months of Inventory has stayed stable at around 8.5 months. I’m even going to go out on a limb and say that I sense we are close to reaching the bottom in the pricing cycle…
Short Sale Information,