The Universe Giveth & It Taketh Away

By the end of?September, virtually all annual Orange County home price gains vaporized.

The COVID tailwind that propelled many buyers to coastal areas like ours — pushing prices up and fomenting frenzied sales — the likes of which I hope never to see again, finally ended.

That’s a good thing.

Despite what armchair quarterbacks would have you believe, prices aren't crashing.

September?closed with the fewest homes sold in decades: 33% fewer than the past year and 40% fewer than in?September?2020. The number of homes sold decidedly crashed. Prices have softened, and appreciation has stalled completely. OC’s median price is off 10% from the high of $1,059,000 in April, settling slightly above January levels. Even so,?September’s median price was higher than ever.

Distressed inventory is neither accumulating nor is traditional resale inventory. So yes, active inventory levels peaked higher this year than last — but to say 2021 was an unprecedented year would be the greatest possible understatement. That freakish anomaly aside, OC housing inventory peaked at just over 6,000 units in July, versus typical highs of 9,000+ units in prior years, and has tapered down another 17% since.

We're still 30% below normal available inventory.

In this context, waiting to buy or sell will get everyone nowhere. According to every analyst I can find, purchases made today will be effectively the same as sales closed within the next four to five months.

If you see a home you love, buy it in October.

-Attom Data Solutions

The Federal Reserve continues its commitment to raise rates until the economy reaches parity. This means that even if home prices decline further in Q4, as they always do at year-end, the higher costs to finance will negate any benefits from waiting.

Experts unanimously expect 2023 to start slowly. Buyers fatigued from waiting on the sidelines for circumstances to change will eventually begin to play ball. Sellers who stubbornly refuse to sell at a discount will sporadically begin to accept lower offers. Regardless, Q1 ’23 will start as Q4 ‘22 ends, with somewhat lower prices and historically fewer sales. However, I’m betting that by Q2, we’ll see the surge that always comes after sales have been suppressed by artificial (aka psychological versus?market) forces. Summer will manifest with slightly more homes sold at slower than typical seasonal appreciation. But prices will sluggishly increase. Next year will end with 5-6% overall price appreciation — essentially keeping pace with inflation.

Will 2023 be a banner year? No. But it will also not be riddled with falling prices.

There is too much-concentrated wealth in OC, which is home to some of the state’s 30 wealthiest ZIP Codes, within the most prosperous state in the country, preventing prices from crashing here. This is an unassailable?fact. Those who point to losses on Wall Street as a harbinger of reduced buying power will have forgotten when Wall Street wanes, real estate gains. The wealthiest are also nimblest and tend to pull out of soft investments reallocating into real estate and other less volatile hard assets. This phenomenon has widened the wealth gap for decades because the poorest residents have not benefited from the dual wealth-building opportunities real estate offers through tax deductions and equity growth.

In the end, dirt always wins.

To put our?market?into terms, we can all understand we will, for the foreseeable future and probably forever, have fewer homes listed for sale and yet have roughly the same demand for them. This in itself will keep a lid on prices. Orange County is among the healthiest, most diverse economies in the state. We have tourism, professional services and thriving med tech. Our population is aging, so we are paying off debt and accumulating wealth disproportionately to younger generations who consume more debt.

Regardless, I agree with the clever new moniker Frederick Warburg Peters of Coldwell Banker Warburg has given to the current irrational?market?conditions. He calls this a?“tornado?market”?in which one home sells quickly while another similar nearby home languishes for weeks without a bite. Tornados touch down and cherry-pick which houses they take, much as buyers do now. It seems inexplicable.

Yet there is always a reason a home hasn’t sold, which isn’t always the price. As rates rise, buyers become increasingly fickle. A house in good condition with slightly dated finishes may get no love, while a comparable home with the most current upgrades will sell quickly. Gone are the days of pricing homes a bit below?market, allowing for remodeling or updates. Buyers won’t have it. They want it all, and they want it now. Our job has become unearthing what turns them on.

Going forward, agents and sellers will have to get brutally honest about why a home isn’t selling. And sadly, appealing to the public’s often uninspired tastes may become necessary. In the end, would you rather spend $50,000 in updates and upgrades or take a $150,000 price reduction? Because that’s likely the choice for anyone trying to resell a median priced home in OC with outdated finishes.

And there are simply too many of us. There, I’ve said the unspeakable.

If real estate was easy everyone would be doing it. Oh wait; they are. At least they’re trying.

The saddest prediction I have for 2023 is the historically high number of real estate licensees will engage in even more unsavory activities to cobble deals together away from public view. This type of “off?market” activity concerns me. Anything done under the veil of darkness should be viewed with suspicion.

Here’s a sobering statistic: There are 4,375 licensed agents with offices in the greater Newport Beach area. Year to date there have been 1,191 sales closed in the same?market?area. Agents from other cities certainly also sell in those communities and vice versa. Yet my illustrative point remains. In general, there’s been one closed sale for every four licensed “professionals” in our?market?since January. Given that the average agent sells four homes a year (sad but true) this means we’ve got roughly 16 licensees fighting over each individual home sold. Bad things happens when there are?dozens of desperate agents, literally going broke, competing for each deal.

And there are too few of them.

The volume of homes offered up for sale in OC will remain squeezed by multiple influences for a very long time. Builders aren’t building nearly enough units, constrained by costs and resistance to increasing neighborhood density by the ever popular NIMBYs and their anti-establishment BANANAs (build absolutely nothing anywhere near anyone).

iBuyers who annoyed us by going directly to homeowners and privately buying their homes are now furthering their offenses by not reselling in nearly the numbers they had before. Myriad iBuyer companies have shuttered or are, at minimum, revisiting their home valuation models. Zillow’s iBuyer program imploded earlier this year, and its AI-driven platform has been officially shuttered after $1.2 billion in write-downs since COVID began. Opendoor, Offerpad and Redfin remain in this space, yet all their stock values took a serious beating. In all, they’ll represent a significantly smaller portion of resellers than previously promised.

And lastly, of course Mr. and Mrs. local homeowner with interest rates below 3%, or zero debt at all, will certainly not be motivated to sell in an environment of such modest appreciation. It will usually make more sense to hold onto the property.

Evidence of housing scarcity is everywhere. Professional flippers are begging brokers for off?market?buying opportunities. Every homeowner has multiple agents knocking on their doors, hoping to unearth a latent seller to put under contract. Sellers who pulled their homes off the?market?are subjected to dozens of cold calls from other agents desperate to put them back under contract.

Yet Phoenix always rises from the ashes. Home resellers coming into the?market?in the coming months will benefit from various new?industry?advancements. Although less likely to get an unsolicited plumb offer delivered by an iBuyer, they'll have more tools with which to attract traditional buyers.

Lenders and credit unions are getting creative with niche loan programs that fit specific audiences and geographic areas. PropTech — that mix of technology and economics driving forward real estate — advances are coming online fast and furiously, endeavoring to broaden buyer opportunities through tech assistance with prequalifications and credit enhancements.

My favorite is Michael Alladawi’s new company?Revive, which manages all aspects of rehabilitating a home before resale to achieve the highest price. Revive schedules, manages and pays all contractors for fast, efficient and cost-effective home makeovers before the sale. This is a timely solution for homes that aren’t appealing to today’s finicky buyers who want perfection. The best part is Revive bills through escrow and, because of their many trade and supplier relationships, do not charge any added premiums for their services. This is going to be a game-changer.

In the next several months, I anticipate a real estate renaissance will begin. There should be a massive shakeout of the excess licensed agents who can’t possibly make a living in a protracted tight?market. Government agencies will continue to seek redress from the real estate?industry?for offenses real and imagined. And I would not be surprised to see a top-down reinvention of how contracts are written and homes are sold in this and other states.

Buckle up. We’ve got tornados and an abundance of other shenanigans afoot. Even if home sales aren’t spectacular, the flood of reinvention will be.