Orange County’s 2019 home sales might be better than what we originally forecasted last December because of a dramatic improvement in two leading indicators during the past two months.
Selling homes is the staff of life for residential realtors, brokers, title agents and mortgage bankers. That’s why it’s so important to have a handle on what’s going on in the home sales market.
As we all know, home sales in Orange County suffered significantly during the Great Recession. In spite of the long-lived recovery that followed, home sales still haven’t reached the pre-recession high. As shown in the “Existing Home Sales in Orange County” graph, existing home sales in Orange County peaked at more than 12,000 units in 2005 before dropping to less than 6,000 units in 2007. In the recovery that followed, home sales hit a post-recession high of almost 8,400 home sales in 2017. Last year, however, home sales dropped 500 units to 7,900 home sales, a 6% decrease. It was the first annual decline in home sales since 2014.
Although a number of factors can explain this drop, the Chapman Econometric Model produced by Chapman University’s A. Gary Anderson Center for Economic Research points to mortgage interest rates as the prime suspect. The “Annual Home Sales and Mortgage Rate” figure shows the inverse relationship between annual changes in home sales in OC and changes in the conventional 30-year mortgage rate. Since 2015, note an upward trend in mortgage rates was mirrored by a downward trend in home sales.
The drop in home sales was also reflected by an increase number of days it took on average to sell a home in Orange County.
The first leading metric pointing to a better 2019 than anticipated is the number of days to sell a house has dropped from 152 days in mid-January to 84 days just six weeks later at the beginning of March.
The second leading indicator is conventional 30-year mortgage rates have declined from a high of nearly 5% last November to a current rate of 4.4%.
In the “Mortgage Rate” and “Average Market Time to Sell a Home” charts, note that the two indicators go hand-in-hand in Orange County. It usually takes about two months before the drop in mortgage rates lead to a drop in the number of days to sell a home.
The bottom line is that the market for selling homes in Orange County has improved dramatically in the last two months. Instead of homebuyers dealing with mortgage rates of almost 5%, the current rate of 4.4% is virtually the same as it was a year ago. And while it still takes longer to sell a home versus a year ago, the difference is fairly small.
Our Chapman Model suggests a lag of one quarter before this improvement in market conditions will measurably improve home sales. Given that lag, the current March-May quarter should begin to show some lift. For the full year, rather than home sales in Orange County declining in 2019 as much as 10% as we projected last December, we now see a decline in home sales closer to 4%. If mortgage rates continue to fall, it’s possible that the market will be better than that. Of course, if mortgage rates move up again, the opposite is true.
Our view is that economic weakening in global markets, especially in the European Community and China, will place downward pressure on long-term interest rates like mortgages for the rest of this year. Decelerating economic growth, particularly in global markets, have boosted demand for long-term U.S. Treasuries in this country and abroad. That outlook spells higher bond prices, lower mortgage rates and a healthier residential real estate sector.
Perhaps it’s not yet time for celebration, but current trends suggest that the mourning period for residential real estate industry is coming to an end, at least for now.
Editor’s Note: Jim Doti is president emeritus of Chapman University and one of the nation’s foremost economists. Fadel Lawandy is director of Chapman’s Hoag Center for Real Estate and Finance.
