Where are the Opportunities for Buyers?

BY MERCEDES SHAFFER

At the end of March, right before the Fed increased interest rates, a duplex in Costa Mesa was on the market for only four days and sold for $240,000 over asking. It had deferred maintenance and low rents, but that didn’t stop buyers from wanting it. The auction-like atmosphere with bidding wars and buyers competing for limited inventory was driving up prices at record speed.

Then the Fed stepped in and dramatically increased interest rates in an attempt to address inflation and the rising cost of housing. Once interest rates went up, we saw a decrease in demand which was also met by a decrease in the number of new properties coming on the market.

Properties that were overpriced sat on the market and as a result inventory started to build. According to Altos Research, 39% of listings in Orange County had price reductions because sellers had not adjusted to the new market and overpriced their properties.

In June, when interest rates were at the highest level for this year, the buyer pool diminished and it was the properties that were priced correctly, in good condition, and in a desirable location that sold quickly. Buyers were more discerning, and properties that weren’t desirable and were over-priced didn’t sell. When the interest rates were low, buyers took whatever they could get and there was no room to negotiate.

By July, buyer demand had dropped

significantly. New escrows in Orange County at the end of July were at 1,690, compared to 2,760 pending sales at the same time last year. That’s 61% more than this year, and the 3-year average prior to COVID there were 2,582 new escrows, which is 51% higher than this year. This is the lowest level of buyer demand we’ve seen in Orange County since tracking began in 2004.

It seems that mortgage rates overreacted to inflation, and towards the end of July rates started coming down. Buyers responded to the drop in interest rates and in August Orange County saw the largest rise in demand since March, which is very unusual because demand typically starts to go down in August and continues to taper during the fall and winter months.

There are a lot of people wanting to buy, and they are waiting for interest rates and prices to drop. The problem is that as soon as interest rates go down even the slightest amount, demand increases, which drives prices up. As soon as interest rates go up, buying power decreases, demand slows, but inventory remains low which makes it still a seller’s market.

By the third week in August, there were 4,102 properties on the market in Orange County, which is the second lowest level for the month of August since tracking began in 2004. Last year, we saw the lowest level with only 2,520 properties for sale, and the three-year average prior to COVID there were 6,753 properties on the market — and it was still a slight seller’s market with prices going up on average 5% per year.

According to a study by Consumer Affairs, 63% of those surveyed want a housing crash, and perhaps that’s because 75% of respondents said they plan to buy a home if the market crashes. Generation Z and the Millennials are the most eager for a crash, with 84% hoping for one because that’s the only way that they will be able to afford to get into the market.

According to Freddie Mac, 91% of renters fear that increased mortgage rates will price them out of the homebuying market which is creating increasing demand for rental housing. The rise in rental prices is now outpacing the rise in property appreciation, and the clients who I’m seeing buying real estate right now are the ones who already own several properties, they understand the market, they want to build their real estate portfolio, and they see it as a great long-term investment.

While it is still a seller’s market, the market is moving at a slower pace, so buyers can take more time to find the right property, at the right price, and with good rental income. The other place where there is opportunity for buyers is with properties where a seller is in the middle of a 1031-exchange. They have identified their up-leg property, they have overpriced their downleg property, so it is taking longer to sell than expected, and suddenly as they approach their deadlines, they are motivated and willing to accept a below-market price.

Properties that are priced right and