As recovery from the Great Recession inches along, the only certainty in the residential real estate market is that there is plenty of uncertainty. Some experts continue to project that the flood of new foreclosures is just over the horizon and heading toward us. We have not seen a flood yet, but the tide is definitely rising. We maintain our by-weekly foreclosure flood watch. In this article, we consider the data for the two weeks ended November 26, 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. Once again, the inventory of active Orange County residential real estate listings continued its steady decrease. For the two week period ending on 11/26/09, the inventory shed another 64 units. While that’s less than a 1% drop, it beats the previous two week’s decline of only 30 units. For the most recent period, the total inventory stood at 7,655 homes for sale. That’s the lowest level of active listings since January 2006. This remarkable decline in inventory has run nearly unbroken since April 2009.

Last year at this time, the inventory was higher by 5,292 units. Two years ago, it was higher by 9,114 homes. According to Steven Thomas of Altera Real Estate, “The active listing inventory will continue its slow descent through the end of the year.”

Looking at the demand side of the equation, Thomas notes “The distractions of the holiday have finally seeped into the Orange County housing market. Demand dropped by 6%, 203 homes, and now totals 3,038. That’s still better than 2,466 posted last year or 1,243 two years ago. Cyclically demand drops for the rest of the year and through the first few weeks of the New Year.”

With less than a 1% drop in inventory combined with demand contracting by 6%, the market time increased. Two weeks ago market time was 2.38 months. For the most recent report, market time increased to 2.52 months. For the first time since late June, the current demand of only 3,038 units fell outside the previous range of 3,100 to 3,500 units.

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, the upward trend which emerged two weeks ago continues.

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 most recent report, 11/26/09. It has increased from 29.6% on October 1, to 32.6% for the most recent period.

Not only has the distressed percentage (short sales and foreclosures) increased in each of the four two week periods since October 1, the actual number of distressed properties in the active inventory has now also started to climb. The number of distressed properties in inventory increased to 2,496 as of 11/26/09. It also increased in the previous two week period. This is the highest this number has been since September 3, 2009, when it stood at 2,516.

According to Steven Thomas of Altera Real Estate, “The active inventory is extremely tight, especially in the lower price ranges, with multiple offers and tremendous competition a new norm. As a result, prices have stabilized in many areas. These are the roots to an Orange County housing recovery. All downturns eventually turn around and it is the activity in the lower ranges that prop up the market. We have the activity, but unemployment and the sheer number of distressed properties, especially short sales, have to work their way through the system first. The spring market, which actually begins for Orange County after the Super Bowl, is typically the best time to sell. Demand will increase, but so will the number of homes hitting the market. There will still be plenty of competition from distressed properties, which will keep values in check throughout 2010.”

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.