Misconceptions, Misinformation and Misalingment

If you're curious about what's happening in the local real estate scene, take a moment to relax, maybe with a strong drink or a soothing cup of Chai tea. Real estate can be a real rollercoaster, and it's more complex than ever.

You know what's interesting? Even the experts can't agree on what the future holds. So get ready for a story that's going to keep you hooked.

Let's talk about our neighborhood for a sec. We've got some seriously rich folks living here, and it's no wonder we're third in the country for millionaire residents. But guess what? Six other counties in California outdo us in terms of how rich they are per person. That says a lot about income inequality around here, and it's not a good thing for our community.

The following charted data from the St. Louis Federal Reserve's FRED economic dataset, vividly illustrates the local trajectory of income inequality over the past decade.

The data depicts the ratio of mean income between the highest quintile (the top 20 percent) and the lowest quintile (the bottom 20 percent) of earners within a county.

So, as we dive into the world of local real estate, keep in mind that it's not all glitz and glamour. There's a lot happening behind the scenes, and it's worth paying attention to.

You've probably heard the buzz about wealthy folks leaving our state due to high taxes and expensive homes. But let's set the record straight. Those rumors might be a tad exaggerated. The truth is, people from all income levels have been moving away in pretty even numbers. Even though more than 400,000 people left, we're still the most populous state in the region.

Now, when it comes to Orange County, it's a bit of a puzzle. Despite our relatively small size at just 305 square miles, we're the 11th smallest county in the state and 2nd most densely populated, with San Francisco County taking the top spot. It makes you wonder if a bit more outward migration might help with some of the unique challenges we face here.

But here's the kicker: even after losing all those residents, our housing supply is still pretty tight. In a typical August, we'd see around 9,000 homes hitting the market, and about a third of them would sell. But last month, we only had 4,002 homes up for grabs, and half of them got snapped up. Compare that to last August when we had 6,228 listings and 2,177 sales. 2021 was just a crazy year with 5,353 listings and 3,116 sales. So, you see, it's been anything but ordinary.

I recently had a chat with someone who thought that super-rich folks from other countries were the ones buying up all the fancy homes in Orange County. Well, let me set the record straight - that's not quite the case. It turns out, we've got plenty of well-off folks right here in Orange County. Sure, some of them were born in other countries, but guess what? When I dug into the records of homes that sold for over $20 million this year, almost all of them went to local professionals. There's just one property that's a bit of a mystery; it's owned by some pretty complicated legal entities, which shows you what a ton of money and smart lawyers can do.

Now, let's talk about the wealth gap. During the COVID pandemic, the rich got even richer. They took advantage of some hefty tax breaks and bought? up real estate while interest rates were dirt cheap. Take, for example, this business owner I know who raked in over $880,000 in pandemic relief for his company. There were many others like him, and it's pretty clear that the wealthiest folks not only weathered the financial storm better but also invested in local real estate, making their fortunes even bigger. Meanwhile, those who weren't as fortunate found themselves in even tougher situations.

As they say, the rich keep getting richer while the rest of us struggle.

Orange County's got a unique challenge. We've got a bunch of super-rich people here, and that makes it tricky to predict what's going to happen in our real estate market and our local economy. We don't follow the same rules as the rest of the state or the country, which can be confusing for folks trying to buy a home and waiting for a big change that just hasn't come yet.

So, what's in store for us? Well, experts like James Doti, who's a big deal in economics at Chapman University, think we might see some bumps in the road ahead, but it won't be as bad as some people are saying.

Let's break it down in simpler terms:

1. Job Outlook: According to predictions from Chapman University and Cal State Fullerton, Orange County's job market is expected to stay pretty steady. However, in some other parts of Southern California, things might not be as rosy, with more job losses likely. Employers might not be offering big incentives to hire new talent, so we could see a slight increase in the unemployment rate, possibly reaching 4.2% next year.

2. Interest Rates: The Federal Reserve is planning to keep raising interest rates, which could lead to what some folks call a "regular" recession. But here's a twist - Bloomberg has some good news. They think the Fed might realize that things are actually looking better than expected. If that happens, interest rates might go down a bit in the near future. That could bring more buyers into the real estate market and might even delay my making dinner plans until 2024!

3. New Homes: Don't count on new construction to solve our housing shortage. Builders are mostly focusing on fancy, expensive homes because materials and labor are costing them a pretty penny. And even though some more homes are going into foreclosure since the pandemic moratoriums ended, the distress rate in California is super low, with just 1 in 4,188 homes affected. These homes are mostly in rural areas, which doesn't really help us with our housing crunch.

4. Airbnb and Taxes: There's been a lot of talk about cracking down on Airbnb and other short-term rentals in places like Huntington Beach and Laguna Hills. On top of that, California Senate Bill 584 is thinking about slapping a 15% tax on income from short-term rentals. This could actually be good news for us. If these properties switch to long-term rentals or get sold, it could add more homes to the market without messing up property prices.

So, let's take a peek into the crystal ball and see what's in store for the real estate world.

I've got a hunch that we're not in for a big housing price crash. James Doti, who knows his stuff, predicted that Orange County's median home prices would drop to around $993,000 in Q2 of this year, then down to $857,000 in Q3, with a little bump up to $885,000 in Q4. If that pans out, this year's overall median would be lower than last year's.

But here's the twist: the numbers we're seeing don't quite match that prediction. The median prices, while not skyrocketing like before, aren't going down either.

Doti's forecasts haven't been right on the money so far. In June, the median price was $1,050,000, which was 5% higher than his guess. By August, it had gone up even more to $1,093,000. Of course, it's still early to say how the quarter will end or if prices will start to ease up as the year wraps up - that's something we usually see in the real estate market towards the end of the year. But I'm leaning towards his thinking that even a small drop in interest rates later in the year could make people more eager to buy homes and keep prices on the upswing.

So, here's my take: I think 2023 will finish with a 1-3% increase in median prices compared to last year. Right now, we're already 1% ahead of 2022.

And here's something interesting - we might not see the usual pattern where home sales peak in the summer and then slow down as the year ends. This time, it's different because most financial experts are saying the Federal Reserve won't raise rates in their September meeting; they might do it in November instead, according to Reuters. If that happens, potential buyers could see it as a green light, and we might end the year with prices a bit higher than the previous year.

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