Unemployment continues to increase, hitting 10.2% for October, a 26 year high. But at the same time, initial claims for unemployment benefits fell to the lowest weekly total since January. On November 6, 2009, the Los Angeles Times included this quote: “The nation's retailers had their best month in more than a year in October as shoppers turned to discounters and high-end stores alike.” To complicate matters further, just as the October unemployment numbers were coming out, President Obama signed a law that, among other things, expands the home buying tax credit. The stock market decided that on balance, the net of all these events was good news and accordingly finished last week with the Dow Jones Industrials just below 10,300. So, what does it all mean for the Orange County real estate market? The expected flood of new foreclosures is not a tsunami, but the tide is unmistakably rising. We maintain our by-weekly foreclosure flood watch. In this article, we consider the data for the two weeks ended November 12, 2009, the most recent report.

Your Editors believe in the basics and when that comes to any market driven item, it means supply and demand. when demand goes up, relative to supply, it is generally good for sellers. Supply is the inventory of active residential real estate listings in Orange County. Demand is measured by the number of new pending sales in the last 30 days. The relationship between the two, called market time, is the demand divided into the supply. The answer, expressed in months, represents an estimate of the average time a property might be on the market, given the current inventory and demand levels. The higher the market time, the more of a buyer's market, the lower, the more of a seller's market.

First, we look at the supply. The inventory of active Orange County residential real estate listings barely managed to continue its steady decrease, falling by only 30 units, to 7,719 homes for sale. That’s the lowest level of active listings since January 2006. Although the current decrease was very small, this remarkable decline in inventory has run nearly unbroken since April 2009.

More surprisingly, demand increased, contrary to the seasonally expected slow down. For the two weeks ending 11/12/09, countywide demand increased by 79 units, to 3,241 homes. We were expecting demand to slow moderately between Halloween and after the start of the New Year. That has not occurred as yet. Last year, during the same two week period, demand also kicked up slightly. With inventory continuing to shrink and demand expanding slightly, market time fell from 2.45 two weeks ago, to 2.38 for the most recent period. The current level of demand is well within the recent range of 3,100 to 3,500 units.

The current demand level, at 3,241 units, also is well above where it stood at this time last year and two years ago. One year ago, demand was at 2,557 and two years ago, at a paltry 1,295, well less than half the current level.

So, what about the flood watch? The number we watch for this is the percentage of the active inventory which are distressed sales—either short sales or foreclosures. While this number has not changed by large jumps, an upward trend appears to be emerging.

In February of this year, the distressed percentage was at44.0%. Then, it began a steady fall. By mid-July, it hit bottom at 29.4%. From July to the beginning of October, it fluctuated randomly between 29.4% and 30.1%. It has climbed steadily from October 1 through the two weeks ending November 12. The increases are small—going from 29.6% on October 1, to 31.9% for the most recent period, but it has increased in each of the three two week periods since October 1.

According to Steven Thomas of Altera Real Estate, “Even though more and more homeowners have defaulted on loans, lenders have not been foreclosing. As a result, the market has grown much hotter with an increase in successful short sales and a shift to more equity sellers.”

But, Thomas adds “Just because a buyer’s offer is accepted, if it is a short sale, it is going to take a long time to close escrow. Since short sales are distressed, their pricing attracts a lot of attention from buyers. Buyers can expect multiple offers in dealing with short sales. In the end, buyers have to move quickly and compete with other offers only to wait for a long period of time for the seller to obtain lender approval. Sometimes the process takes such a long time that the buyer walks away and looks for something else. If a buyer wants to avoid the many pitfalls of dealing with short sales and foreclosures, they should turn their attention to equity sellers.”

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.