Orange County Housing Market Update January 2, 2020

David Deem

The 2020 Forecast: A Stronger Year
Despite the tremendous focus on the “trade war,” the international slowdown, impeachment, Brexit, and stock market volatility, the U.S. economy was strong throughout 2019. Unemployment reached 50-year lows. The GDP was up considerably more than many forecasted. Long-term interest rates dropped from 4.5% to 3.5% before climbing slightly to 3.75% by year’s end. Wall Street had a tumultuous ride, yet ended the year at record levels. The trade war took center stage and became a headwind for the overall economy. Finally, new home sales have turned around after a sluggish start to the year. The overall economy is strong, and the low interest rate environment is a tailwind that will keep the economy running on all cylinders. As a result, the local housing market is going to look a lot better in 2020. Here is the forecast:

·         Active Inventory – the year will begin with around 3,750 homes, the third lowest start in the last decade behind 2013 and 2018. That will translate to a very hot start for housing. The theme for 2020 will be not enough homes on the market. For buyers that equates to not enough choices. Expect the active inventory to peak around July between 6,750 to 7,250 homes.
·         Demand – with an anemic inventory and buyers reenergized by historically low rates, demand will be strong throughout the Spring and Summer Markets. Buyers will be willing to stretch slightly in price compared to the most recent sale; so, expect appreciation around 3 to 4% for the year. Demand will be strongest, and most appreciation will occur, from March through July, and then will downshift during the Autumn and Holiday Markets.
·         Housing Cycle - the housing market will follow a normal housing cycle. The strongest demand coupled with plenty of fresh inventory will occur during the Spring Market. This will be followed by slightly less demand and a continued new supply of homes in the Summer Market. From there, demand will drop further along with fewer homes entering the fray in the Autumn Market. Finally, all the distractions of the Holiday Market will be punctuated with the lowest demand of the year and few homeowners opting to sell.
·         Closed Sales - the number of successful, closed sales will increase 3 to 5% compared to 2019 (2019 was up 2% compared to 2018), around 30,000.
·         Luxury Market – luxury sales will increase from 2019’s record by about 10%. The Spring Market will be the strongest for luxury, and the second half of the year will be especially sluggish.
·         Interest Rates – look for mortgage rates to hover between 3.5% to 4.5%. Long term rates are driven by economic fundamentals and headline risks. The “trade war,” Brexit, the upcoming presidential election, global growth or slowdown, all drive mortgage rates up or down. If the economy continues to improve, rates could rise into the 4’s. With more negative news, rates could drop further. Currently, mortgage rates are hovering around 3.75%. Do not expect them to change much as 2020 unfolds.
·         Distressed Inventory – in 2019, distressed sales, foreclosures and short sales combined, only accounted for 0.9% of all closed sales, 250 total. Do not expect the level of distressed sales to change much at all.

The bottom line: 2020 will shift back to a much hotter market. Expect a HOT Seller’s Market during the spring with slowly rising values. Multiple offers will be the norm for homes priced below $1 million. Once again, the market will heavily favor sellers and buyers will have to pack their patience in order to isolate their piece of the American Dream. For the second half of the year, the market will evolve into a slight Seller’s Market, where sellers still get to call more of the shots, but home values do not change as much. Pricing will still be very important all year long as buyers do not want to overpay. They will stretch slightly during the spring, but sellers who overprice will kick themselves down the road. 

DRE #01266522


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