2015 1Q Market Report for Orange County
PUMP FAKE - Rates hold steady at low levels to feed additional housing gains in Orange County
Last quarter, we anticipated a breakout in rates that would halt the meteoric rise in residential orange county real estate and add pressure to home prices as homebuyers started to feel the sting of higher payments when looking to buy at escalating prices. As you can see from the chart of rates below, rates briefly broke above its resistance, which seemed as an obvious precursor to higher levels. Luckily for market participants, rates checked up and reversed their breakout conditions to fall back in line with the trend of lower rates. As a result, rates dropped to levels not seen in quite some time and homebuyers gained confidence pushing prices up even higher.
This chart shows the 10 year note yield index – this is a good gauge for interest rates on home loans.
Rates cannot stay at this level forever – there are economic risks of inflation if rates don’t begin increasing with a similarly stronger economy. Lower gas prices and solid job growth numbers have created conditions where the Federal Reserve can think about hiking rates with limited backlash against fresh gains to the overall economy.
When interest rates rise, the payments for a loan increase significantly for the same priced home. As a way to see the impact, the monthly payment on a $500,000 loan at 4% is $2,387 per month, whereas at 5% it is $2,684 per month - a difference of almoth $300 per month or $3,600 per year. Obviously, buyers must find more inexpensive property as rates rise becaue they can afford less. The effect of higher rates puts pressure on home prices as sellers cut prices to become more appealing to fewer buyers.
We were early on our call last quarter for higher rates, but we believe that we’ve already seen the lowest rates of the year and we believe that yields (rates) will continue to rise into 2016.
Exuberant investors thwart homebuyers
Investors continued their streak of snapping up bargain priced properties and shutting out first time homebuyers and even move–up buyers. Across the country, appropriately priced properties have been met with good interest and those that are in need of repairs with upside in renovation are met with multiple counter offers to ravenous buyers. Investors have a distinct advantage in multiple offer situations and they are adept at using it their leverage. A homebuyer who wants to live in a property is no match for all-cash offers with few contingencies, which is providing good profit potential for investors, but frustrating move-in homebuyers. Move in homebuyers are left to fight with other homebuyers for rehabbed and full-priced property, which is leading to multiple counter offer situations among the best rehabs and has continued to frustrate buyers and brokers alike. We anticipate that investors will soon decide to starting sitting on the sidelines after such a good run of continued gains, which will bring the leverage that is currently enjoyed by sellers, closer to equilibrium.
It has been very disappointing over the last few months to see so many properties being outbid and won by investors. Many sales in the past 6 months have shown that buying a home, putting $30-40k in repairs /improvements only to sell it for $100k more 6 months later highlight the opportunity that has been available. The quality of some of these rehabs are lacking the polished finished as investors try to churn their investments as quickly as possible. Such is the ways of a capitalistic marketplace, but as prices continue to expand, we inch closer to the time when the tables will turn and increased inventory will soon bring leverage back to buyers.
As you can see from this chart, inventory levels remain low, while number of units sold has dwindled in predictable fashion due to the time of year. Look for Days on market to turn lower as seasonal buyer demand starts to creep into the market absorbing the inventory available. Prices should continue to rise as long as rates stay low and the economy holds its upward momentum.
We believe rates will start rising around mid to late summer and that the huntington beach real estate market will go into an early hibernation with a dropoff in inventory and demand later in the year. Until then, as low rates continue to stay low through the spring, we are hopeful that more inventory will appear to lessen the trajectory of home prices for buyers, but demand has already begun to ramp up and inventory is still sparse. If you are thinking of selling, it is advisable to get your house on the market now while there is limited competition – these conditions will give you leverage to sell for the best price all year. We anticipate that throughout 2015, real estate prices in orange county, California will continue to climb at a somewhat aggressive rate until late in the summer when the balance of power between buyers and sellers will balance out to make a stagnant second half of the year.