Things are never the same everywhere, all at once

I made you wait for this report, because the holidays are a bit hectic. If you're like me and hate waiting for pretty much anything, you can opt in to have new updates emailed to you immediately, at WendyHooperRoss.Substack.com.

Because most other real estate reports arrive 45 – 60 days after the fact, here’s a preview of headlines you can expect to see between Christmas and the new year. “Orange County’s average home prices falling!” And “OC inventory surges by nearly 10%!”

While true, these clickbait headlines are only sound bites from a far less sensational story. And by the time you see them, they’ll be old news. Snore. Context is everything, people. I’m laying out all the facts now, so you know what’s really going on before everyone else does.

If you’re baffled by Orange County’s November real estate market, you’re in good company. I’ve waded through the data, and the market narrative reads like a mystery novel with a twist on every page. Here’s a summary:

A Tale of Two Metrics

• Median Price: Up 5% year-over-year in November (YoY)

• Average Price: Down 1.4% YoY

Cue the confusion. Year-to-date (YTD) figures add another layer:

• Median Price: Up 12.2%

• Average Price: Up 9.2%

The average price was down in November and homes also took a few days longer to sell compared to last year. Yet, the market isn’t unraveling. So, why the divergence? Because real estate, much like my morning coffee order, is more complicated than it seems.

The Luxury Factor

Typically, I focus on median prices for their clarity, but the average price deserved a closer look this time, because instead of each data set essentially mirroring each other, they began to move quite differently last month. It was like watching a pair of synchronized swimmers suddenly break into freestyle—unexpected, intriguing, and worth diving into!

Initially, I suspected that closing fewer ultra-luxury sales was dragging the average price down. Turns out, I was half-right.

Okay, I’ll admit this is not the most earth shattering chart. (I can’t help myself - I’m a Capricorn - this nuance matters to me.) But it was notable that the average price (green line) fell below last November’s level. While median price (blue line) steadily, albeit minutely, trended above last year. Here’s why that happened.

• Above $4M Sales: 55 homes sold last month vs. 51 last November

• Above $10M Sales: 5 homes sold vs. 8 last year

Instead of following the trend of softening into Q3, September’s average price was pumped up when three sales closed above the $20 million mark (flipping freestylers)! Another 14 sales closed, priced above $10 million. This pushed the average price higher than in prior months. Fast forward to October and November, as fewer mansions sold, the average price declined seasonally as per normal.

So, November was not the anomaly - September was.

Three fewer mega-sales in November dropped the average price 1.4% from October. Does that mean prices are falling? Not even remotely. Buyer competition usually wanes from fall into winter, which results in lower prices. Don’t listen to the noise, people. Media thrives on juicy headlines, not necessarily facts.

Inventory + Demand = The Magic Formula

By November’s end, Orange County needs only 435 more closings to surpass last year’s total sales, thanks to 9.5% more new listings and a slight dip in mortgage rates fueling sales. More inventory = more sales. Revolutionary, right?

To anyone loudly predicting an inventory surge means prices will crash: the data disagrees. Increased supply hasn’t tanked prices. Instead, long-overdue supply is just beginning to meet demand. More than anything else, this could herald a return to normalcy. It’s been so long since we’ve seen normal, we barely remember what it looks like. It’s like my dating life - but I digress.

Consider this data nugget:

• The number of available listings priced below $2M dropped 15% YoY.

• Sales in this category dropped only 11.6% YoY.

Translation? Demand outpaced supply. There is still significant pent-up demand, particularly in the lower price ranges. Adding another 10% in inventory would provide a valuable boost to the market. But that’s not going to happen.

A Win for Entry-Level Buyers

Sales of homes priced under $2M rose 12.4% YoY in November. This shows that slightly improved rates brought rate-conscious buyers back into the market. But here’s the problem: only 24% of homes sold went to first-time buyers.

Why does this matter? Because homeownership is how most Americans built generational wealth. Fewer first-time buyers are hopping aboard the wealth-accumulation train, a trend that’s bound to have ripple effects. Reduced spending and saving will inevitably follow, accelerating the erosion of the so-called "middle class"—whatever that even means these days.

Sales volume overall remains well below historic norms. Fewer sales means weaker property tax revenue growth, which impacts public services like schools and local infrastructure spending. So, if you’re cursing while dodging potholes in your luxury car, maybe reconsider the impact of pricing others out of the market. Allowing neighbors to split lots and build ADUs would be a great start. Just saying.

Rental Market’s Role

The rental market, meanwhile, has absorbed much of the inventory homeowners aren’t selling. This swelling of leasehold inventory has helped keep median lease rates relatively tame, rising only 3.6% YoY. But with a current median lease rate of $4,300/month, that’s hardly affordable, making it difficult for renters to save money to eventually buy a home. Or food.

Why aren’t more homeowners selling? You can thank the 2017 Tax Cuts and Jobs Act, which capped SALT (state and local tax) deductions at $10,000. Most homeowners in high-cost states like California and New York took a massive hit when this passed. Before, they were able to write off state income and property taxes paid, which commonly equated to $40,000 or more. This was slashed by 75% overnight. Many Orange County homeowners now find renting their homes out to be far more lucrative than selling, thanks to generous property tax breaks for rentals that remained mostly intact. It’s the taxpayer version of “Robbing Peter to pay Paul”.

What’s Next for OC Real Estate?

Forecasts predict 4% home price appreciation nationally in 2025. But that doesn’t begin to make sense here, because of Orange County’s unique market dynamics:

1. Population Density: With 3,255 people per square mile, we’re the second most densely populated county in California – second only to San Francisco County. Buildable land? Virtually nonexistent.

1. Wealth: OC ranks among the state’s ten wealthiest counties, ensuring financial resilience, even if the economy suffers. Significant foreclosures aren’t happening here. Stop waiting.

1. Jobs: High-paying roles in professional services and med-tech will keep demand for housing strong and prices high for years to come.

OC has too little inventory and persistent demand, which is unlikely to change any time soon. Most new construction developments are apartments and senior living communities. While all housing is good housing, there are not enough homes available for purchase. This is compounded by a disproportionately high number of repeat buyers who are not selling their current homes.

National forecasts for relatively tame home price appreciation next year are based on surging inventory from new home construction, and more sellers finally listing homes. Supply is expected to increase faster than demand across the country. This makes a lot of sense - pretty much anywhere but here. Local supply will not meet, no less outpace, demand any time soon.

My prediction? 8-9% home price appreciation in 2025, fueled by slightly less constrained inventory met with robust demand. While twice the expectation nationally, this will still be much slower appreciation than we’ve seen here in recent years.

Final Thoughts: Should You Wait or Act?

• Buyers: If you’re holding out for lower rates or prices, stop chasing a unicorn. We can strategize to make today’s rates work for you. No. Rates won’t fall below 6% next year. You need to make a better plan.

• Sellers: If you’re waiting for another round of double-digit appreciation, don’t. You’re already behind the curve. 2024 was your last chance for that. Remember that total babe you’ll always regret not asking out? It’s like that.

If you need to move, let’s craft a plan. Whether buying, selling, or strategizing for both, there’s always a way. Together, we’ll find yours.

The moral of this November tale? Orange County’s real estate market is as competitive as ever. While rates, taxes, and trends ebb and flow, demand for this slice of paradise remains unwavering. Let’s make your next move a smart one.