Fence-sitters, Flippers & the Fed -Real Estate Winners & Losers Revealed

2022 changed what we thought we knew; 2023 will crystalize the future of OC real estate.

Context is everything. Right? (Just ask some of our favorite politicians.)

We know plutonium, Liberty coins and vocalists displaying six-octave ranges are particularly valuable — a determination ensured by the rarity of their existence and difficulty to procure.?

Real estate is no different; given the complexities of the market, we also require context to understand the market dynamics. As a trusted adviser, I'm here to provide the context you need to understand the Orange County residential real estate market. (Whether you take my sage advice is your prerogative but tread cautiously if not.)

COVID-19: The gift that keeps on giving

Let's take a step back and consider what we faced in 2022.

The pandemic challenged almost every human's concept of what "home" meant to them. This was not a uniquely American phenomenon; it was global. As a result, virtually all world governments decided to act swiftly in 2021, uncertain how much financial and medical support their citizens would need to prevent economic disaster and a humanitarian crisis.

Many countries banded together to provide financial incentives, debt relief, scientific research, and medical and other assistance, distributing the strain of the pandemic across the most significant economies. The USA notably provided foreclosure relief to homeowners, eviction moratoriums for renters, and payroll and other business loan relief to businesses large and small. Along with most global economies, we were challenged to find balance in 2022 as we emerged into our "new normal."

A September 2022 McKinsey report found that all global economies, save Europe and Greater China, cited inflation as a primary concern following governmental stimulus responses to COVID-19. Europe's only more significant concern was the more immediate issue of energy prices. At the same time, China was logically concerned about geopolitical matters. As a result, the U.S. responded with aggressive Fed rate hikes in rapid fire, relentless succession to thwart rampant uncontrolled inflation.

That said, most countries have had, and are still dealing with, the same economic issues as we are here at home. Most relevant to this year-end real estate summary, the housing crisis was, and remains, a global issue. And in so very many unflattering ways, the U.S. leads the world in the matter of first-world homelessness and deaths among the unhoused. At the same time, our nation's collective real estate values rival global GDP "a few times over," according to Urbanet. We're not alone in widening the wealth gap, but we are indeed at the head of the pack.

Okay, we didn’t suffer mass extinction. So what the heck do we do now?

(May I suggest washing your hands? C’mon, people. How is this news?)

This little trip down memory lane of global pandemic responses is vital for understanding what happened here in the U.S., California and Orange County last year. Access to financial relief clearly disproportionately benefited the wealthiest among us. Renters had eviction and unemployment relief but little else. Thus the pandemic conveniently jammed the wedge more deeply between the "haves" and "have-nots."

The vast majority of the "haves," who padded their bottom lines with bailouts, took advantage of ultra-low interest rates to buy homes where they felt their families would be better insulated from the pandemic. This contributed to the mad rush to purchase coastal OC homes, which are "affordable" within the context of California's other coastal communities. (Bear in mind, when compared to the rest of the state and nation, OC is considered "coastal.” (Yes, even you, Yorba Linda.)

Local buyers seldom needed to sell their homes before buying another. And buyers from costlier areas also didn't contribute to the local supply of resale homes. Thus, our inventory of homes offered for sale was stifled throughout 2022 while demand remained red freaking hot. This was obvious in the exponentially higher number of homes sold above $10 million since 2021. Twice as many sold compared to 2018 and five times as many as in 2014.

Luxury homes sold fast and furiously, like a 1950s fight over wedding dresses at a Filene's Basement sale in New York. Overall, a stupendous volume of homes sold at higher and higher prices to wealthy buyers who weathered the pandemic best.

This is not to say only the wealthiest seized opportunities. This free-for-all was evident across all price points. The sudden supply of effectively free money fueled homes to sell faster than ever until higher rates halted the frenzy.

The pity party ensued

The Fed's aggressive rate increases put a boot on the neck of home sales everywhere. But what was less obvious had a more insidious impact. Homeowners who refinanced into the lowest rates in U.S. history were faced with a dilemma at the end of the year. Would they sell their homes now with low-interest rates only to buy another at twice the spread, or not? Even more homeowners resoundingly said, "Nope," amund they didn't sell. Then, of course, some bought, and some didn't. But effectively, none of them sold, tightening the lid on housing supply. So our already small pool of listings became even smaller. (Cue the “Friday the 13th” theme music.)

Simultaneously, Millennials — and some fortunate Gen Zers — decided it was well past time they left familial nests and formed new households. Yet there was nowhere for them to go. OC's vacancy rates are at historic lows, and lease rates are at historic highs. Thus these eager high-income earners also were placed in an unenviable position.

When faced with paying historically high rents or potentially overpaying for a home where they could lock in their housing payments, many raced to buy before rates rose any higher — creating more demand for a virtually nonexistent housing supply.

What's past is prologue

Let's pump the brakes for a minute to address the question everyone always asks me: "How can people afford to buy here?"?

Trust me, enough can. Daddy Warbuck’s kids are alive and well in the OC.

Local companies, juiced with government loans and grants, threw crazy salaries and signing bonuses at jobseekers, frantic to fill open positions. Add these well-paid up-and-comers to more established buyers, who either bought homes for themselves or, fed up with Wall Street's poor performance, opted to buy rental properties. As a result, the pool of buyers swelled beyond anyone's expectations.

In summary, we wound up with significantly less supply and higher demand here in OC than most all other SoCal counties, creating a nightmarish perfect storm. Real estate IS hyper-local.

To illustrate my point, here's a chart showing the supply of SoCal homes for sale relative to homes sold for Orange, Los Angeles, Riverside, San Bernardino and San Diego counties combined.

When we isolate the same data for OC alone, it's an entirely different story.

This pattern continues. January is on track to have 40% fewer homes for sale than usual. Although the sales rate is less ferocious than in 2022, 2023 will not provide the falling prices that make buyers salivate.?

In fact, I expect 2023 to be a pretty stable year for local real estate, a sentiment shared by others.

"We're estimating about a 5% drop nationally. Some markets, believe it or not, will probably see prices continue to increase."

...Rick Sharga, the executive vice president of market intelligence at ATTOM.

Those with equity not only call the shots. Those rich with equity will get richer. The rest are pretty much out of luck.

OC is among the markets where prices have likely eroded as far as conceivable. So it'll be bumpy as buyers and sellers duke it out, and prices will bobble up and down in the coming months. But in the end, I expect OC's annual median price for 2023 will wind up 1-2% above last year. Not sexy, but also not a buyers' market.

Sellers are simply not in distress. A wave of foreclosures isn't coming. Although foreclosure filings are increasing, they're still only at 80% of pre-pandemic levels. In fact, one in three California homeowners has no mortgage at all. After eroding from the dizzying heights of last spring, today's equity position generally remains 20-25% above what it was pre-Covid. Virtually everyone has significant equity. This means sellers have time to wait for the prices they want. Even the few who face financial difficulties can sell their appreciated homes without waiting for their lenders' consent or participation.

And although buyers are not happy with higher mortgage rates, they can find loan terms that work for them if they want. In addition, lenders are starting to carve out specialty programs in the 5-6% range, lessening the pain to a degree. Even so, expect most buyers to be extremely picky about, well, pretty much everything. Rates are already coming down, and January home sales have started a bit more robustly.

January is starting with 40% fewer homes for sale than typical, 3,596 versus 6,900, and only 30 days to market compared to 62. By historical (pre-pandemic) standards, this is a very hot January. Obviously, sales are significantly tempered by interest rates at 20-year highs. Yet expecting prices to fall when supply is low, and demand remains high, as does the pace of sales, is not smart. So instead, we'll have fewer sales and much the same prices.

Disneyland and other tourist destinations face struggles, and layoffs will doubtlessly impact surrounding housing markets to some degree. However, most of those made jobless are renters and not homeowners. The most likely outcome is that rental rates will flatten in some communities while they continue to increase elsewhere.

Let the games begin

Also impactful are external influences. Notably, the 2028 Summer Olympics — dubbed LA28 — will be hosted at scattered SoCal venues. Among them is Anaheim's Honda Center, which will host volleyball competitions. I'm already directing investors to pick up rentals there before the '28 games. Not only will there be a tremendous opportunity for short-term rentals, but there also will be an increased need to house all the service people who support the games and businesses surrounding the venue on a longer-term basis. So, the short-term flattening of rents around Anaheim will likely be offset by outsized increases in later years.

Although not in Orange County, Long Beach is near enough that it would be foolish not to consider buying in that area. In addition, several Olympic events will be hosted from Belmont Shores to downtown Long Beach. So again, even if the tourism industry has a short-term downturn, this massive influx of athletes, support staff, media and spectators will be offset in a few years.

Hot takes on the ’23 market

I don’t have a crystal ball. But I do have decades of experience in a variety of housing markets, so my prognostications are a bit better than Carnac the Magnificent. Here’s where I predict real estate is heading in 2023 and thereafter.

• OC home prices will remain mostly flat in 2023 and will begin to pick up steam in 2024 with single-digit gains in prices. By 2025, more people will jump back into the market, and values will pick up a bit more again. We won’t see double digit increases in values for several years.
• 2023 housing inventory levels will continue to be 30-40% below pre-pandemic norms, preventing price erosion.
• Lease rate increases will outpace home prices as people who can’t find a home to buy are forced into rentals. Landlords will win.
• Interest rates will range between 5-6% in coming months and years, with more aging buyers opting for reverse mortgages.
• Homes at higher elevations will hold values better due to flood concerns and costs to insure homes at sea level.
• Canyon area homes will continue to struggle with values also due to costs for insurance.
• My inbox is full of messages from flippers desperately looking for homes to buy below market. Clearly that market has dried up.?

?If you are looking for a home — and I mean a home, not a flip or a piggy bank — there is every reason to buy now. Inventory will be extremely tight for a while, and it will take longer to find one right for you. So start now.?

Sellers waiting for the spring market may regret waiting because there is far less inventory now. If my hunch is correct, a sizable volume of fence-sitters will bring homes onto the market in a few months, shooting themselves in the foot by waiting only to face increased competition. Buyers may score the occasional deal in spring. But more is needed to risk missing out on a perfect home for them. I'm already dealing with buyers who regret letting one get away. It's painful.

Every market has sweet spots. This is no different. Call me to discuss your strategy and long-range goals. We'll get you there — if you listen to me. Too many wistful clients from '22 have said they should have heeded my advice and now regret it. I'm with them; I'd prefer seeing my clients achieve their real estate goals than being able to say I was right.

#data #dataanalysis #ocrealestate #sellers #buyers #homebuyers #marketanalysis #socalrealestate #socalbroker #projections #womanownedbusiness