Written by Jon Long on September 6th, 2022
It's no secret that we've been in the midst of one of the hottest housing markets the U.S. has seen in a good long while. Following the onslaught of the COVID-19 crisis in 2020, it was hard to tell where the real estate market was heading in the following years. Would the market recover faster than the economy? Or would it come to a standstill with people still worried about the virus and being in public? However, in 2021, the overall market in the United States took a sharp turn upward with inventory sinking lower and prices driving higher and higher.
Most buyers across the country have experienced this type of market craziness over the past two years, especially in the Orange County, CA area. It has not been uncommon for buyers to have to make 10-20 offers before actually winning a bid. Not only that, but most buyers have had to make offers $50,000-$75,000 over asking price while also waiving the inspection, appraisal, and other contingency periods. It might sound insane, but it's a reality buyers have had to face.
When you combine an influx of people wanting to buy houses all at the same time after 2020 with record-breaking low interest rates and inventory, it's no wonder that the housing market caught fire. However, as we are well into the back half of 2022, the housing market seems to be slowing down with homes becoming more available to buyers than they were in 2021.
How do we know? Here's your 2022 real estate market update.
One major indicator that real estate professionals keep an eye on to gauge the future of the housing market is the number of price drops happening in certain areas. Over the past two years, sellers have experienced bidding wars and have primarily controlled the narrative in negotiations. However, we're now seeing the number of price drops happening in Orange County increase.
In June 2022, nearly 40% of sellers in the Orange County area dropped their listing asking price because of a decrease in demand among higher mortgage rates and more inventory available. If you've tried to buy a home in the past two years, you know that this change in asking prices is a big deal for the market.
It's also important to note that as of summer 2022, home sales in Orange County have dropped 38% year-over-year. The number of home sales almost directly correlates to the overall status of the real estate market in Southern California, which makes this statistic hold some weight. As home sales slow down, so does the market.
It's clear that home prices and number of homes sold in a given time frame are great indicators of where the overall market stands, but rental prices are also a good metric for predicting where the market is heading.
It's no secret that affording rent in Los Angeles, CA or New York is no small feat. Over the past two years, that has only proven to be more and more true. However, while rental prices in the rest of the country have continued to increase for 14 months straight, Southern California actually saw a small drop in average rental costs for the first time in a long time.
The number of days a listing is on the market tells experts how hot a specific area might be. When the average number of days on the market falls, let's say from 20 days to 10 days, it's clear that there is a huge amount of demand for real estate in that area.
Let's put this in perspective. In August of 2019, the average number of days a home was on the market in Orange County was 46 days. Seem like a long time? That's because it is. Fast forward into August of 2020, that number had dropped to 36.
In the Summer of 2021, the average number of days on market in Orange County dropped to 17 days. Now? The number is up to 19 days. Not close to pre-pandemic levels, but we're seeing homes last longer on the market. This is an indicator of a cooling market, making bidding less aggressive for home buyers. The real estate market in Orange County California and surrounding areas is still tilted in the sellers'; favor as of August 2022, however, we are starting to see fewer offers, more days on market, and less aggressive offers that are not willing to wave appraisals or other contingencies.
One of the biggest catalysts of the real estate market boom at the end of 2020 and into 2021 was mortgage interest rates were at historic lows. At the turn of the century, it was normal to expect your interest rate to be around 6-8%. More recently, anything between 3-5% was considered good. In 2021, we saw interest rates dip into the 2%'s to encourage people to spend money and purchase homes after the economic drop-off of 2020. Well, the idea worked and created so much demand that inventory couldn't keep up.
However, now we're seeing interest rates rise into the 4-6% range, making it harder for some buyers to qualify for a monthly mortgage payment on homes that land on the upper end of their price range. Because of this, competition between buyers has slowed down which leads to a more balanced market.
Though the Orange County real estate market seems to be cooling off, that doesn't mean that we have fully transitioned into a buyer's market quite yet. Here are a few trends we're still seeing in the second half of 2022:
Seasons come and go for buyers and sellers wanting to get the best deal possible on a home. Depending on your urgency to buy or sell, you can most likely wait a year or two for the market to make a turn to balance out - it's simple economics.
However, it's important to stay up to date on current real estate market conditions because by understanding what's happening right now, you'll be much more likely to forecast what's coming in the future.
So, while the California real estate market is certainly cooling off and moving in the direction of being more affordable and approachable for buyers, we are still seeing signs that sellers will have the upper hand when it comes to negotiations. However, more inventory means more opportunity. Add in price drops and homes lasting longer on the market, and we're seeing a market that will be much more favorable to buyers as it continues to cool.