When a record low number of available homes is matched with fierce pent-up demand, it results in an auction where homes sell immediately and for more than their asking prices.
Selling Above the Asking Price
It is common for homes that are just placed onto the market to receive dozens of offers to purchase, pushing up home values at a rapid pace.
For over a century, the predominate way to sell a home in Australia has been by auction. The appeal of an auction is that homeowners believe they can get a higher price by forcing buyers to compete against each other in a bidding war. An auctioneer is hired to conduct the bidding process. The more that participate, the higher the price. It has been argued that the auction system has resulted in sky-rocketing housing prices.
In the United States, for the most part, homes are not sold by auction. Yet, talk to any buyer over the past couple of years and they would argue that the real estate purchasing process feels more like an auction than the conventional way of buying a home. There once was a time when homes generated only one or two offers and the overall temperature of the market was much different than today. With today’s extremely limited inventory and throngs of buyers interested in every home that comes to market, a bidding war develops. The asking price can be seen as the “reserve price,” the minimum bid acceptable to a seller. Often, offers that come in at the asking price do not excite many sellers, resulting in delays in response times until “better” offers come along.
Initially, record low mortgage rates paved the way for white hot demand. An unbelievable 17 record lows were achieved after the country slipped into a pandemic back in March 2020. The lowest rate was reached during the first week of January 2021 at 2.65%, according to Freddie Mac’s Primary Mortgage Market Survey®, which dates to 1971. But recently, rates have dramatically climbed from 3.05% on December 23rd of last year to 3.55% as of February 3rd. That’s a half of a percent in a very short period, and they are poised to rise further as the U.S. economy continues to improve.
It is no longer low mortgage rates that are stoking the fires of demand; instead, it is the severe inventory shortage. The inventory has plunged to record lows, starting off the year at 954 homes. Today, it has risen slightly to 1,426 homes, but that is still far from normal. The three years average prior to the pandemic (2017 through 2019), there were 4,843 homes, an additional 3,573, or an extra 281% more, nearly quadruple. There are simply not enough homes available to match demand.
Demand, the number of pending sales over the prior month, has exceeded the inventory level since February of last year. That’s a full year where demand has been outpacing the supply of available homes. It is no wonder that the inventory has fallen to an incredible catastrophic level. There really is nothing available to purchase. Every home that enters the fray is inundated with showings, and, if not priced ridiculously out of bounds, generates plenty of offers. With so much buyer competition, sellers get to call all the shots. Buyers have been willing to wave inspections, wave the appraisal contingency, offer a 60-day rent back, and close in a timeframe that is most suitable for the seller.
Current demand is at 1,683 pending sales. Demand is 413 higher than the active listing inventory. The three-year average for demand prior to COVID was 2,160, significantly lower than the three-year average for the active inventory of 4,843 homes, 2,683 lower to be exact. That illustrates how demand is normally a lot lower than the supply, not the other way around, as is shown in the chart above.
When demand outstrips the supply, it indicates that it is an insane, outrageous, red-hot housing market where buyers are pit against each other and Darwinism ensues, survival of the fittest. In today’s market, typically the buyer that is most qualified with a great job, large bank account, strong credit score, willing to remove contingencies, and bend to a seller’s every whim is the victor. That includes offering more than the asking price. In January, 60% of all closed sales in Orange County sold above their asking price. And, it is not isolated to the lower end. If a home is priced right, regardless of price range, a bidding war follows.
The auction-like atmosphere will continue if inventory remains at ultra-low levels. Higher rates are not yet deterring buyers from purchasing, but if they continue to rise, it will be a totally different story down the road.
A WARNING TO SELLERS: Carefully pricing a home is crucial to obtaining the best outcome regarding price and terms. Pricing at or slightly above the last comparable pending or closed sale will expose the home to the largest buyer pool. The auction that follows will have buyers competing against each other to achieve success. This results in sales prices above their asking prices, and in many cases, way above their asking prices. Stretching the initial asking price considerably above the comps may still result in achieving the ultimate goal in selling; HOWEVER, it will be at the expense of not obtaining the highest and best price and terms.
Active Listings
The current active inventory added 190 homes in the past two weeks.
The active listing inventory increased by 190 homes in the past couple of weeks, up 18%, and now sits at 1,270 homes. It was the largest increase for this time of year since 2006. Even with the rise, the current level is by far the lowest level for a February start. The 3-year average prior to COVID (2017 through 2019) was 4,843, an extra 3,573 homes, or 281% more, nearly quadruple compared to today. Contributing to the unbelievably low inventory is a lot fewer homes coming on the
market. In January, there were 2,437 homes placed on the market compared to the three-year average of 3,054 homes, 20% less. A combination of factors, from the Omicron variant to fear of not being able to isolate a replacement home, are precluding many homeowners from participating in today’s Orange County housing market. If rates continue to rise, demand will ultimately ebb allowing for the inventory to finally climb on the backs of overpriced homes that sit and accumulate on the market. In this kind of an environment, sellers will need to be more accurate in pricing.
Last year, the inventory was at 2,493, 96% more, or an additional 1,223 homes. The biggest complaint last year was that there were not enough homes on the market, yet there were a lot more choices compared to today.
Demand
Demand surged by 18% in the past couple of weeks.
Demand, a snapshot of the number of new escrows over the prior month, increased from 1,426 to 1,683 in the past couple of weeks, adding 257 pending sales, up 18%. The limited number of homes available has translated to lower demand readings. Typically for a start to February, demand rises by 26%, or 450 pending sales. There is quite a bit of pent-up demand from a deluge of unsuccessful buyers who have been attempting to purchase for months now. Buyers are lining up to see every home that hits the market. Even with higher rates, buyers are willing to pay the extra premium just for the opportunity to finally own a home. Yet, if rates continue to rise and break above 4%, many buyers will begin to back off and competition will diminish. This will allow the market to slow, and the inventory will finally rise. It just depends upon where rates go from here. Only time will tell.
Last year, demand was at 2,590, 54% more than today, or an extra 54%. Year over year comparisons will be off through the rest of this month due to market changes because of COVID. A much better comparison is looking at the 3-year average prior to COVID (2017 to 2019), which was 2,160 pending sales, 28% more than today. In Orange County, current demand readings have obviously been muted by a lack of available homes and not enough coming on the market.
With both supply and demand increasing at the same rate, the Expected Market Time (the number of days to sell all Orange County listings at the current buying pace) remained unchanged at 23 days, an insane, Hot Seller’s Market (less than 60 days) where there are a ton of showings, sellers get to call the shots during the negotiating process, multiple offers are the norm, and home values are rising rapidly. Last year the Expected Market Time was at 29 days, similar to today. The 3-year average prior to COVID was at 70 days, substantially slower than today and a Slight Seller’s Market (between 60 and 90 days).
Luxury End
Both the luxury inventory and luxury demand climbed in the past couple of weeks.
Even with the recent volatility on Wall Street, the luxury market in Orange County has continued to surge. In fact, luxury demand of homes priced above $2 million in the past couple of weeks increased by 27 pending sales, up 14%, and now sits at 217. The luxury inventory of homes priced above $2 million increased by 46 homes, also up 14%, and now sits at 382. A welcome relief in any price range at this point is more homes coming on the market. With both supply and demand increasing, the overall Expected Market Time for luxury homes priced above $2 million remained unchanged at 53 days, an extremely hot market for luxury.
Year over year, luxury demand is down by 28 pending sales or 11%, and the active luxury listing inventory is down by 339 homes or 47%. The Expected Market Time last year was at 88 days, exceptionally hot for luxury, but slower than today, indicating just how unbelievably hot the luxury market is right now. However, the year over year difference is beginning to narrow.
For homes priced between $2 million and $4 million, the Expected Market remained unchanged at 34 days. For homes priced between $4 million and $8 million, the Expected Market Time increased from 74 to 79 days. For homes priced above $8 million, the Expected Market Time increased from 172 to 219 days. At 172 days, a seller would be looking at placing their home into escrow around September 2022.