Forecasting the Orange County real estate market has always been a dicey proposition. About a decade ago, I was one of the real estate writers who looked at the data relating to the economy and the local housing market and determined that the demand would not catch up with the supply for at least another 10 years.
That was an informed opinion, based not just on data, but on comments from several housing industry leaders, but their optimistic predictions did not allow for the external financial shenanigans conjured up by many of the nation’s leading financial institutions.
What happened as a result is the creation of a “new normal” in the housing market. One new normal example is the fresh news that homebuyers in southern California are paying cash for their homes in record numbers. The stats from DataQuick Information Systems shows that in January 2011, 27.4% of the homes sold in Orange County were paid for with cash. That is not only the highest month in more than 24 years, it is also almost 2.5 times the 10-year monthly average of cash sales, which is 11.3%.
Even more surprising is that a large percentage of luxury homes, those more than $1 million, are cash purchases. Orange County’s Balboa Island led all California communities in 2010 cash purchases with an incredible 66.7%.
This sharp increase in all-cash transactions begs the question: Why would someone pay cash when mortgage rates are so low — when money can be multiplied far greater in today’s stock market than it can in real estate?
The possible answer may be good news for everyone. Paying cash for a home at this time is a bet, just as a stock buy is a bet. When those with millions to spend on a home purchase it with cash, they are betting that compared to other investments, their home purchase will generate a greater return.
If these investors are correct, then we have hit the bottom of the housing price wars. Better still, they are betting that the prices will climb more sharply and faster than, for example, the stock market, which has been generating generous returns for almost a year.
But there is more to the new normal than just an increase in cash buys. The old normal was that condominiums sold in greater numbers when buyers could not afford a detached home. Whether it was due to skyrocketing prices or rising mortgage interest rates, buyers used condos as a less expensive way into the market, with most of them hoping to build some equity and trade up after several years.
Historically, home and condominium prices rose and fell together. Today, however, the home and condominium synchronicity is gone.
January 2011 gave us several good examples. Again, using numbers from DataQuick, we see that home sales in one Costa Mesa ZIP code, 92626, were up 4% over January 2010 while condo sales were down 8.7%. In the other Costa Mesa ZIP code, 92627, home sales were up significantly at 40% but only 12.9% for condos.
And in Huntington Beach, three of the four ZIP codes showed home sales declines from January 2010, but condo sales rose in two of the ZIP codes. But here is the curiosity in Huntington Beach: In the ZIP code where home sales increased, 92649, condo sales dropped 24.4%.
The conclusion is that real estate is still trying to find its footing. During this time, we’re likely to see developments we haven’t seen in a long time, if ever.
STEVE SMITH is a Costa Mesa resident and a freelance writer. Send story ideas to smi161@aol.com.
