By Mercedes Shaffer l Published in AOA Magazine
There’s been a lot of noise in the media about a “housing recession”. Although it’s true that closed sales slowed in June and July, the media likes to indicate that sales plummeted. Unfortunately, I’m hearing far too often that people feel that real estate prices are going to drop, so many would-be buyers are waiting for prices to plunge the way that they did during the Great Recession of 2008. Although no one knows the future, the market data doesn’t support a wait-for-a-crash approach.
Asset Appreciation
When the media writes about a housing market recession, people automatically assume this means real estate prices are going to plummet. Yet, a recession does not mean that housing is in a crisis and that values will drop. Only two of the last six recessions prompted a drop in home values, the Savings and Loan Scandal of 1991 and the Great Recession of 2008, both instigated by the missteps of the housing industry. The other four recessions resulted in the housing market appreciating in value.
Strong Buyer Demand
The current recession that experts are alluding to is the minor drop in sales volume in June and July that was a response to the sharp rise in interest rates. In August, Southern California saw the largest rise in demand since March, which is very unusual for this time of year. Typically demand starts to go down in August and continues to taper during the Fall and Winter months.
Lending in 2008 Compared to Now
Every recession is different, and during the Great Recession unemployment skyrocketed and housing was a huge “house of cards” built on years of subprime loans, pick-a-payment plans, teaser rate adjustable mortgages, and fraudulent lending practices. It was not a shock that housing values sank. Today’s lenders have much stricter guidelines they have to follow to qualify a buyer for a loan, and most buyers are locked into a 30-year, fixed-rate, low-interest mortgage and have tons of equity built up.
Distressed Sales
Distressed homes, both short sales and foreclosures combined, made up only 0.2% of all listings in Orange County. In August, there are only 5 foreclosures and 2 short sales available to purchase, and in contrast, during the housing crisis of ‘08 there were almost 6,000 distressed homes on the market.
Inventory in 2008
In 2008 there were almost 18,000 homes for sale in Orange County and the length of time a property sat on the market exceeded 400 days. Today we have less than 3,800 properties on the market and expected market time is below 70 days, indicating that we are still in a Seller’s market and nowhere near what happened during the Great Recession.
Inventory is Decreasing
Beginning in August, inventory has been slowly decreasing across Southern California and it’s already much lower than where it was prior to the pandemic. It appears to have peaked at the end of July and it will likely continue to slowly descend from now until mid-November, just prior to Thanksgiving. From that point through New Year’s Eve, inventory historically plunges, which would pave the way for a very low start to 2023. This again drives a strong Seller’s market at the beginning of the year, just like we had this year.
Seeing the Big Picture
The majority of renters are hoping for a market crash. Skyrocketing rental prices are also motivating them to want to purchase a home. With home prices and mortgage rates soaring, many have been priced out of the market and see a crash as a way to get in. The rate of appreciation of rental income is now exceeding property value appreciation, so while property prices and interest rates may seem high, if you purchase a rental property now (in the right city) you will likely see a more reasonable GRM in the future. Many people who understand the long-term value of real estate are buying now with the idea that they can refinance in the future. If you wait for interest rates go down, there is likely to be a lot more competition amongst buyers.
Now What
The data that shows what’s really happening in the market doesn’t sell stories, and if you listen to the hype about a looming market crash and wait to buy, you will likely be left behind. There are a lot of people who want to buy and are waiting for interest rates AND prices to drop. The problem is that as soon as interest rates go down even the slightest amount, demand increases, which drives prices up.
The combination of high prices and low inventory is creating higher demand for rental housing. If you’re thinking of buying or selling, but not sure about the timing, I think it’s a great time to make a move. Whether it means buying a new property, selling and doing a 1031-exchange to re-leverage into more units, or even selling your property to get top-dollar. The best time to purchase real estate was yesterday, and the second-best time is today.
Mercedes Shaffer your Orange County real estate agent helping you build wealth one door at a time. If you have questions or comments she can be reached by phone or text at 714.330.9999, by email at InvestingInTheOC@gmail.com or visit her website at www.InvestingInTheOC.com. Mercedes Shaffer is an agent with Pacific Sotheby's International Realty and specializes in helping clients buy and sell real estate and perform 1031 Exchanges. DRE 02114448. *Data taken from the MLS and ROH
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