OC's Rental Market Keeps Getting Hotter
By Mercedes Shaffer
The housing market has been on fire for the past two years due to the combination of historically low inventory, record low interest rates, and huge buyer demand. Many have been wondering when the market will cool down, and we’re finally starting to see a shift that could make it a great time to invest in rental housing
Record Low Buyer Demand
With the recent increase in interest rates, buyer demand for residential property has dropped significantly. New escrows in Orange County at the start of July were at 1,710, compared to 2,761 pending sales for this same time last year. That’s 61% more than this year, and the 3-year average prior to COVID there was 2,582 new escrows, which is 51% higher than this year. This is the lowest level of buyer demand we’ve seen in Orange County since tracking began in 2004.
High Demand For Rental Housing
The sharp rise in interest rates has pushed many buyers out of the market. Buyers who qualified for a $1,060,000 loan at the beginning of the year when interest rates were around 3% may only qualify for a $780,000 loan now, and it’s going to continue to worsen for buyers if the Fed’s keep increasing interest rates. The decrease in buying power has caused many would-be buyers to return to the rental market creating exceptionally high demand for rental housing. With higher-income earners increasingly entering the rental market and competing with people who traditionally rent out of necessity, the demand for rental housing is growing -- which is pushing rent prices up even higher. In many cases, this is also giving housing providers a more qualified pool of renters to choose from.
Small Homes Being Replaced By Mega Homes
Another factor contributing to an increased demand for rental housing is what seems like a shrinking supply of affordable housing in Orange County. Since 2008, there hasn’t been enough new construction to meet the demands of our growing population. Adding to the challenge, oftentimes when a small fixer-upper comes on the market, it’s acquired by an all-cash developer who immediately levels the home and replaces it with the largest possible home permitted. In the past two years especially, I’ve seen small single-level homes get torn down and replaced with large two-story houses that sell for significantly more, thus reducing the quantity of lower cost properties available. This is especially true in coastal communities.
Active Listings Increasing
With buyer’s pulling back, the number of active listings is steadily increasing. At the start of the year there were only 1,100 homes on the market in all of Orange County, which was the lowest level ever since tracking began 19 years ago. Today there are over 3,800 homes on the market and if interest rates hold steady or go higher, inventory is likely to grow. Last year at this time there were 2,528 homes on the market, 34% fewer than today. In 2019 there were close to 7,500 homes available, so even though supply is rapidly increasing, inventory is still significantly below pre-COVID levels.
Buyers Aren’t The Only Ones Pulling Back
There has also been a sharp decrease in the number of properties that have been coming on the market. In June, 11% fewer homes came on the market compared to the three-year average prior to COVID. Many sellers are concerned that they won’t get top dollar if they try to sell now, so they are choosing to wait. If you plan to sell in 2022, the sooner you put your property on the market the better. Even though fewer properties are coming to market, the days on market is lengthening, inventory is steadily rising, and it’s likely to get more difficult to sell as the year progresses.
Foreclosure and Short Sales
If you’re waiting for a housing crisis similar to the disaster of 2007-2008 to purchase a distressed property, we are far from anything near what the market was back then. Both short sales and foreclosures combined made up only 0.2% of all listings in Orange County. As of mid-July, there were only 5 foreclosures and 1 short sale available to purchase in all of Orange County, compared to almost 6,000 distressed sales available in 2007.
Values Are Steadily Rising
Multifamily has been a great vehicle for building wealth. Even with all the changes in the market, we haven’t seen real estate prices drop. When we look at Orange County’s multifamily real estate over time, we see that median multifamily sale prices in the past 20 years for 2-4 units have increased an average of 8.1% year-over-year. Along with the 8.1% asset appreciation, these investments produce rental income, and there is the added benefit of deductions such as depreciation and other related expenses.
Rental Housing Is Becoming a Competitive Sport
While bidding wars are subsiding in the residential housing market, they are heating up in the rental market. Demand for housing is high and rental prices have skyrocketed. Business-minded property owners are adjusting rents to new market conditions to preserve cash flow, keep up with increasing expenses, and to maintain the value of their property. The lack of inventory in Orange County, coupled with high interest rates has created a white-hot rental market, making it a great time to own investment real estate.
Mercedes Shaffer is a real estate agent with Pacific Sotheby's International Realty and specializes in helping clients buy and sell residential and multifamily rental properties and perform 1031 Exchanges. 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 you can visit her website at www.InvestingInTheOC.com.
DRE 02114448. *Data gathered from the Multiple Listing Service and Reports On Housing.