The Orange County residential real estate action is heating up as the new buying season gets off to an early start. With the statewide Unemployment rate and the number of employed people in Orange County both holding steady, the demand for Orange County real estate is the strongest for the beginning of a year since 2004. We run the numbers for the two weeks ended January 21, 2010.

We keep it simple by focusing on 5 numbers: 1) supply (the number of homes in the active inventory, aka, inventory), 2) demand (the number of new pending sales in the last 30 days), 3) the market time (supply divided by demand, yielding an estimate of the number of months a property might be on the market), 4) the number of distressed properties in the active inventory (includes foreclosures and short sales—sales where the mortgage is greater than the property’s value), and 5) the percentage of active inventory which is distressed properties.

For the first time since early last year, the inventory of active Orange County residential real estate listings actually increased. The inventory now stands at 7,680, an increase of 387 homes.

Rather than seeing this increase in supply as a negative, Steven Thomas, of Altera Real Estate says “The current increase is typical for this time of year now that the holidays are behind us. We are at the beginning stages of developing the Spring market.”

If demand goes up proportionally to the increase in supply, or even goes up ahead of the change in supply, it could mean the market is starting to heat up. Compared to the last report, for the two weeks ending 01/07/2010, this is exactly what happened. Demand went up by 282 units, or 12.5%, but the supply, inventory, increased by only 5.3%. Thus, the market time fell slightly.

This means the last two week’s increase in homes on the market can be absorbed by the concurrent increase in pending sales. But, because of the seasonality in the home buying cycle, it is more revealing to compare to previous years.

Thomas says “Over the past two weeks demand increased by 12% to 2,547. The Orange County housing market has not seen demand this strong at this point of the New Year since 2004. Last year’s demand was at 2,146, 401 fewer than today. Two years ago it was at 1,219, 1,328 fewer than today.”

Not only is demand stronger than either of the last two years, it comes on top of much lower supply. The active inventory last year was at 11,560, 3,880 additional homes compared to today. Two years ago it was at 15,245, 7,565 additional homes.

There is even a sliver of good news on the distressed side of the active inventory. For the first time since the beginning of last October, the percentage of active inventory which is distressed homes, managed a slight decrease. At 2,674 units, the number of distressed homes in inventory increased compared to two weeks ago, but, it went up at a slower rate than the increase in total inventory. Thus, the percentage fell from 35.0%, to 34.8%. Certainly this is not a significant decrease, but it is the first drop in four months.

That’s the good news as it relates to distressed properties. The bad news is the increase in distressed properties in inventory, at 118, was the largest single increase since this statistic bottomed out and started up last October.

This suggests that the threatened flood of new foreclosures, while still not what we would call a flood, has been gaining momentum for nearly four months.

But, Thomas says “There are many skeptics and naysayers who believe that the hot market is temporary and totally propped up by the government. Many point to the tax credit, or the low interest rates to explain away the current hot demand. Others point to the pending “shadow inventory” of foreclosures that lurks around the corner and will destroy demand. With the government potentially ending their purchase of Freddie Mac and Fannie Mae loans, interest rates are going to go through the roof and slaughter demand, according to the skeptics.

Those that labeled real estate a bubble back in 2005 were right. Values have dropped substantially. Foreclosures and short sales have flourished. But, what the current naysayers are missing is that values have dropped to levels that have improved affordability substantially. First time home buyers have come out of the woodwork. Interest rates have dropped to ridiculously low levels. Investors have reemerged. Interest rates will increase this year, but that will help reel in current rampant demand. Even though the government is stating that the end of their mortgage purchases is coming, they will not let rates increase much past 6%.

It’s the incredible drop in prices that has fueled demand. In looking at long term data, values have dropped too much from where they should be today. They were way too high back in 2005, but they are too low in 2010. Does that mean that Orange County real estate is going to appreciate this year? Not with so many distressed properties on the market. Distressed properties are keeping a lid on appreciation for now.

Basic economics always prevail. As prices fall, demand increases. They eventually fall to a point where demand begins to surge. This surge places a bottom on the drop in values. In the lower ranges, prices have bottomed (and in some really hot areas are actually increasing).

The current OC real estate is essentially made up of three very different real estate markets: MARKET 1: the below $1 million market. A vast majority of the market is below $1 million. This market represents 77% of the active listing inventory and 93% of current demand. The expected market time for homes priced below $1 million is 2.5 months, a seller’s market with multiple offers that fetch sales above their asking prices. This is especially true below $750,000. This market is sizzling.
• MARKET 2: between $1 million and $1.5 million. This market represents 8% of the current active inventory and 4% of current demand. The expected market time is 5.73 months, which is just about at equilibrium. This market is all about price. Sellers that overprice their homes will sit. Buyers can afford to be more patient, but distressed properties that are priced well are snapped up quickly. This market is tepid.
• MARKET 3: homes priced above $1.5 million. This market represents 15% of the current active inventory, yet only 3% of demand. The expected market time is 18 months. Anything above 10 months is virtually at a standstill, a deep buyer’s market. This market is frozen.”

In this article series we report on the numbers for Orange County in total. Real estate is very local and any buying or selling decisions should be based on the circumstances of the specific neighborhood involved. This series is intended to provide information about the general countywide trends in supply and demand.

All of the real estate data in this article is from a report published by Steven Thomas of Altera Real Estate.

This report appears in www.OC180NEWS.com every other Monday, alternating with our biweekly West Orange County Business and Jobs report.