This biweekly Orange County Residential real estate report includes our regular foreclosure flood watch, a check on demand and inventory of OC residential listings, and some forecasts of 2010. www.OC180NEWS.com runs the numbers for you—data for the two weeks ended December 23, 2009.

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.

First, we look at the supply. Continuing the seasonal slow down in activity, the inventory of active Orange County residential real estate listings fell by 207 homes, to 7,381. That’s the lowest level of active listings since December 2005. But, what about the much discussed “shadow inventory”?

According to Steven Thomas of Altera Real Estate, “There is a giant shadow inventory, but many economists and analysts have made the error of presuming that lenders are purposely holding already foreclosed homes off of the market. Instead, most of the shadow inventory is already on the market as short sales. There are over 7,000 in Orange County alone that are on the active market, pending or on hold.” More on the distressed inventory later in this report.

Looking at the demand side of the equation, the seasonal drop continued, but at a much slower rate. In our last report, demand fell by just under 400 units. This time, it dropped by only 131 homes, to 2,515. Even though demand has fallen off during the last several weeks, it remains much better than recent years. Thomas notes “That is still much healthier than last year at this time when demand dropped to 1,997 homes, 21% slower than today. In 2007, demand was at 1,031 homes, 59% slower. Current demand is also at the strongest level for the finish to a year since I started tracking the Orange County housing market five years ago.”

The 2.7% drop in inventory was nearly doubled by the 5.0% decline in demand. Thus, the market time increased from 2.87 to 2.93. While still representing a seller’s market, this market time is the highest since mid-April of this year.

Thomas reports “The current expected market time is also at a much healthier level going into 2010. At the current expected market time, it is technically a seller’s market. Distressed properties are keeping a lid on any real appreciation, but all of the other trimmings that go along with a seller’s market are very much a part of today’s housing landscape: multiple offers, sale prices above list prices, tremendous competition, and buyer frustration.”

Of the five statistics we track for this report, two of them relate to the long forecasted flood of new foreclosures. Those two statistics are the number of distressed homes in the inventory and the percentage these properties represent of the total inventory. Both of these statistics have been increasing for the last few weeks, but it has been more like a steadily rising tide, than a flood. For the most current report, we wouldn’t call it a flood, but the increase looks more like the rising surf of a distant storm.

The number of distressed properties in the active inventory increased by 28, to 2,537. While the number of additional distressed homes in inventory is small, the total now represents 34.4% of the total active inventory. Just like inventory, we must go back to the spring to see these levels. The portion of distressed listings in the active inventory began its steady fall back in April, as the real estate market began to stabilize.

For the end of April, the distressed percentage was at 35.9%. It continued its steady drop until hitting 29.6% in mid September. It has been increasing relentlessly since then.
It is, of course, very possible that this increase in the distressed percentage is primarily the result of forced liquidation, combined with a normal seasonal decline in voluntary listings. Rising unemployment surely must cause an increase in distressed listings, and this would not be much affected by normal seasonal patterns. On the other hand, discretionary listings, and hence total inventory, have at least in part decreased due to seasonal factors. Thus, combining the increase in nondiscretionary distressed listings, with a seasonal drop in total listings, yields an increasing distressed percentage. Nevertheless, beware of the rising surf.

Now, for the forecast of 2010. Thomas qualifies his forecasts as follows:
“Forecasting draws from historical data and circumstances to predict the future. Yet, we are currently in uncharted waters, making forecasting the housing market more of an art than an exact science. There have already been many forecasts released that are all over the map. It reminds me of picking NFL football games during the first week of the year when there are a lot of surprises.”

The looming presence of so many distressed properties will be a factor in the future of Orange County residential real estate for some time to come. Thomas said “Short sales have become a major part of the housing market and will be throughout 2010. There are 2,159 short sales on the active market, 4,037 short sales are pending and 856 have been placed on hold. All of these statuses combined total 7,093. Short sales represent 48% of all listings, pendings and properties on hold. As a buyer, it is very difficult to avoid short sales and their lengthy process. The bottom line, there is tremendous demand for distressed properties and buyers should not have the expectation of being able to offer much less than the purchase price.”

Thomas has these comments regarding the tax credit and the home loan limit: The first time home buyer tax credit also had a positive impact on the housing market along with the increased conventional loan limit to $729,750. The tax credit was supposed to end November 30th, but has since been extended through June of next year. Also, the credit has been expanded to include move-up buyers who need to sell their homes first. Homes need to be pending by April 30th and close by June 30th.

So, we can expect a bump in activity due to the credit for the first half of 2010. The government was late to provide an extension to the increased conventional loan limit from 2008. So the first few months, the conventional loan limit dropped to $625,500 and then it was increased again to $729,750. The increase was set to expire at the end of 2009, but this time the government actually planned ahead and extended the increase through the end of 2010. This is very important to the Orange County housing market since loans above the conventional loan limit, jumbo loans, are much more difficult to obtain.”

Thomas has these other forecasts:
• The lower end, below $1 million, and especially below $750,000, will continue to experience strong demand and values will remain flat or appreciate slightly. Buyers and sellers can continue to expect multiple offers and sales prices at or above the list price.
• The upper end, above $1 million, and especially above $2 million, will continue to experience muted demand along with a drop in value. The upper end is catching up with the large drops in value within the lower end. The drop in value will be led by an increase in distressed sales in the upper ranges. Jumbo loans may be tougher to obtain in the upper ranges, but as values drop, demand will increase.
• The number of units sold will increase year over year slightly. The difference will be much stronger in the first quarter of 2010 and the gap will tighten for the remainder of the year.
• The discretionary seller will return to the marketplace, keeping inventory levels at a healthy level. We can expect the active inventory to grow to no more than 9,000 homes.
• Short sales will be king in 2010. With the federal government turning their attention to short sales, the process is going to get a whole lot better. The government had been strong arming lenders to modify loans, but success has been very limited. There will be a lot more short sale approvals, which translates to successful closed short sales. The infamous “shadow inventory” will actually translate to more short sales. Short sales are already a major component of today’s real estate market. The only thing missing right now is a higher success rate and that is about to change.
• The number of foreclosures to hit the market will increase slightly year over year, but will NOT be a wave fueled by the “shadow inventory.”
• We can expect the distressed inventory to rise slowly with more short sales and foreclosures to hit the market; but, this will be offset by incredible demand for distressed properties. With demand so high, distressed properties will be placed at the last comparable sale, not below.
• As the Federal Reserve purchase of mortgage-backed securities comes to an end after the first quarter of 2010, interest rates will rise to about 6%. That may seem like a giant jump, but 6% is still low historically.
• It is going to be a long wait for homeowners waiting for the market to rebound. With unemployment high and more distressed homes to hit the market, the most likely scenario is going to be a flat market for the next couple of years, with no real appreciation or depreciation.

Stayed tuned to www.OC180NEWS.com

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.