Orange County Real Estate Stats

There is much confusion and accidental mis-information about the current state of  Home and Condo Prices in Orange County, CA.   Part of the confusion results in the unique market conditions we are now in in which the lower end of the house pricing spectrum is more negatively impacted then the higher end.  The accidental mis-information comes into play by the established organizations that report on housing prices (ie: DataQuick, Major Banks, Major Title Companies) who rely on Average and Median prices, versus Average Price per Square foot.  When you couple to two events together, you wind up with some confusing housing price information. 

We’ll illustrate the conflicting numbers, and then hopefully give some clarity to the subject.  But first some basic definitions.   The Average for homes prices, is simply the sum total of the sales prices of all homes sold in a certain area (ie: Orange County, Santa Ana) during a certain period of time (ie: 12 months, 6 months, 3 months), and then dividing by that total number of homes sold. 

The Median is determined by taking the same list of sold homes, and calculating the sales price at which half of the homes sold were below this price, and half of the homes sold were above this price.  Although the Median is a bit harder to calculate, it is considered to be a bit more accurate representation, since the Average can be more easily skewed to the high side by a few very high priced homes sales during the period.  Both of these calculations though, can give mis-leading representations when you have a change in buyer habits… which is exactly what is happening now in Orange County. 

As an example of the confusion caused by Averages and Median in a changing market, take a look at this recent DataQuick report by the Orange County Register reporting Median home prices for all cities in Orange County.  Buena Park is showing a 20% drop in prices, while Cypress is showing a 6% increase in the same time period.  Dana Point shows a 21% increase in prices, while the adjacent city of Laguna Niguel shows a 10% drop during the same period.  What gives ?  Logic dictates that something is wrong with this type of statistical analysis.  The misleading statistics are a result of looking at Median and Average prices, instead of Price per Square Foot, and also combining Condo sales with detached Home sales. 

Below is a table of statistics that we gathered for the Average, Median and Price per Square Foot for the Past 3 months (Sept, Oct, Nov), and the same calculations for the same 3 month period 1 Year ago, for various Cities throughout Orange County, for detached Homes only (not including condos).  As can be seen, some Cities show only a small drop in Average home prices, and others yield an increase in the Average price, but a decrease in the Median price… while a few other cities are actually reporting an increase of almost 17% to 35% in the past year in Average or Median prices.  For instance, Dana Point and San Juan Capistrano are showing large increases in the Average or Median prices in the past 12 months.  But ask anyone on the street, and they tell you this is preposterous.  The actual truth about home pricing in these two cities (and the rest for that matter) are more closely revealed by looking at the Price per Square Foot which shows a 5.8% drop in Dana Point and a 10.5% drop in San Juan Capistrano.

Sept, Oct, Nov  2006′

Sept, Oct, Nov  2007′

t size="4">Percent (%) Change in Past Year

How can this be you may ask ?  In the past 12 months, there have been fewer entry level buyers purchasing lower price detached homes using low down payment financing in Dana Point and San Juan Capistrano.  While there has been a relativity larger percentage of higher income buyers purchasing larger – higher priced homes, but at sales prices substantially lower then they were 1 year ago.  

The major reporting agencies (DataQuick, Banks, Title Companies) have relied upon  Averages and Median prices for years since this data is easier to gather then Price per Square Foot, and is also easier for the average consumer to relate too.  A newspaper Headline that reads “Average Home prices in Irvine have now reached $800,000″ is a lot more eye catching then to say “Average Price per Square Foot in Irvine has now reached $433″…   But as can been seen by the above tables, Averages and Medians can offer some very mis-leading conclusions about home prices during times of change in a marketplace.

As most everyone knows by now, the Orange County Real Estate market has been taking a beating in the past 12 months.  The rate of sales is at it’s lowest level in 20 years. And, unlike the mis-information reported elsewhere, prices have already dropped by 10% or more…  But there may a ray of hope. 

As shown above, we have been charting the Months of Inventory since July of 2002′.  A significant drop in the months of inventory just occurred for the first time since May of this year.  This is due to the number of homes active for sale slowly and steadily decreasing since August, and more importantly, there has been an increase in the number of homes Pending In Escrow in the past two weeks (See chart at the bottom). Home prices started to decline starting back in June of last year (2006’), and a few more buyers are jumping off the fence and purchasing homes at this low prices. (See chart below)

The above chart shows price per Square Foot for both detached homes and attached Condos, for cities in south Orange County, excluding the beach towns (ie: San Clemente, Dana Point, etc.), for we have found that a few Ocean Front estate sales throws a wrench in the stats for that month.  Price per Square Foot is a more accurate measurement of the percentage movement of home prices. Compared to Median or Average prices, the Price per Square Foot is more immune to changing buyers habits, such as more buyers buying more bigger homes now versus more smaller homes years ago.   As you can see in the Price per Square foot graph below, home prices peaked in April of 2006’ at about $410 per square foot, and have since pulled back to about $364 per square foot today, which represents a drop of about 11%.  Also, these closed sales prices actually lag behind a changing market since they are based upon last months closed sales.  Today, homes on average are selling at about 3% to 4% less then their asking prices, and asking prices today are based mostly on recent sales (if not a bit lower). 

Therefore, I expect that in the next several months (Jan of 08’), we’ll see this Price per Square Foot graph drop down another 4% or so to about $345 per square foot.  This would place home values at the same level they were at back in May of 2004’, and would  represent an overall drop in prices of about 15% from the peak in pricing.  If the prospective fence sitting buyers continue jumping off that fence, which I expect they will, homes prices should hold at about the $345 per square foot level for most of 2008’, and then probably start to gradually rise in laste 2008′ or early 2009′.  Based upon most every previous year, I also expect the number of sales (Pending homes In Escrow) to gradually rise as well starting in Jan of 08’.  

I have a hunch that this correction is going to work it’s way through much faster then the previous correction back in the early 1990’s  The last price correction started around early  1990, and lasted until 1996 or so… 6 years.   Back then The OC went Bankrupt and  many jobs were lost and the population decreased.  Also, that was before the Internet age when Buyers and Sellers got most of their information from agents, appraisers, lenders, and the newspapers.  Now, a prospective buyer/seller can hop on the Web and instantly gather market info via graphs, charts, reports, research, etc… which ultimately enables them respond in a more timely and less emotional way, which I think will result in this being a much shorter duration correction then the 1990’s