Demand is Low Due to Affordability: An In-depth Look at Southern California's Real Estate Market

Unpacking the Paradox

Despite the higher mortgage rates, the real estate market is buzzing with activity. Homes are selling above asking prices and buyers are seemingly more than ever. However, the reality is quite the contrary. In fact, fewer buyers are in the marketplace than many realize. 

The Disneyland Analogy

This situation is akin to Disneyland limiting its attendance to half but operating only half of its attractions. The result? The lines remain as long as a typical summer day. This is precisely what is happening in the housing market today. 

With mortgage rates nearly at 7% and affordability at tragically low levels, prospective home buyers would expect a market full of options. Instead, they are met with a catastrophically low inventory of homes, igniting a fierce competition among buyers.

An Overview of the Orange County Market

Today's Orange County housing market is characterized by a lack of affordability, low demand, a limited number of homeowners willing to sell their homes, and an anemic inventory. To understand why buyer demand is weak, we must consider the historical trends of interest rates, incomes, and home prices, and their impact on affordability. 

The Historical Context 

In the 1980s, the average mortgage rate was 13.75%, and yet, the monthly housing payment was 55% of the median household income. Fast forward to 2000, mortgage rates dropped to 8%, the median income more than doubled, and the monthly payment was 40% of the median income. 

Despite soaring home prices in 2020 and 2021, the monthly payments remained within manageable limits due to historically low mortgage rates and higher median household incomes. However, this changed dramatically in 2022 when mortgage rates hit 20-year highs.

The monthly payment for a median-priced home in Orange County now consumes an astounding 72% of the median household income, pushing home affordability to record lows.

Current Demand vs. Pre-Pandemic Levels

The current demand for homes, based on new pending sales, is the lowest it has been since 2004. There may be fewer buyers, but there are even fewer homes available, creating a market that feels incredibly hot. 

The Inventory Standstill

The inventory of available homes is a staggering 66% lower than pre-pandemic levels, with only 2,276 homes available across Orange County. One of the main reasons for this standstill in inventory is the reluctance of homeowners to sell their homes. Their hesitation stems from their existing low fixed-rate mortgages, which significantly differ from today's rates. 

A staggering 87% of all California homeowners with a mortgage enjoy a fixed rate at or below 5%.

The Impact on Sellers

Consequently, fewer homeowners are willing to sell, resulting in an inventory shortfall that hinders the satisfaction of even today's weaker demand.

The Expected Market Time

Despite the affordability crisis, the market is red hot. The Expected Market Time (the number of days to sell all listings at the current buying pace) is at 44 days, the second-lowest level for a start to July since tracking began in 2004. 

This hot market is not due to extraordinary buyer demand but to a severe lack of homes for sale.

Much of the numerical data and graphs used in this blog post have been sourced from Steve Thomas's comprehensive reports on Reports on Housing. His in-depth research and insightful reports have greatly contributed to our understanding of the market dynamics at play.

Summary: The Affordability Factor

To summarize, affordability is the primary factor curtailing demand in today's real estate market. The limited inventory of homes further exacerbates the problem, creating a highly competitive environment for potential buyers. These are challenging times, and understanding the intricacies of the market can provide valuable insight for both buyers and sellers.

Learn more about Southern California's real estate market trends and real estate listings at The Cole Group Let's navigate these uncharted waters together, turning your real estate dreams into reality.