My Thoughts On The Orange County Market

There is a lot of discussion about affordability, and I have even been lambasted for putting my name and link to this blog. But as a long-time resident of the city of Mission Viejo in Orange county, I would like to point out what effects rates have on our market to demonstrate that even if prices go down (professors at Chapman argue that prices are not expected to retrench much more than they have currently) the home buyers may be able to afford more now than they will next year if interest rates tick up.

With that in mind, lets look at a Mission Viejo home priced at $1,000,000 (wow homes are expensive in Orange County.) Okay, so if you bought a house for $1,000,000 with no down payment and a 30 year fixed mortgage with a fixed interest rate at 6.25% (today’s published rate on Wells Fargo.) Given this scenario your monthly mortgage payment will be $6,157.17.

So now what if prices do go down but interest rates go up? What if home prices dip by 5% and rates tick up from 6.25% to 7.0%? Well, that million dollar home is now priced at 950,000. However the monthly mortgage cost has increased to $6,320.37. As a home buyer, I would have been better to buy the million dollar home at the lower rate.

The great unknowns here are pricing and interest rates. Nobody is arguing that rates will increase. They are just discussing when they will tick up. Pricing as well is an unknown factor. In various areas of the country (Florida, and even San Diego) prices have dipped significantly. However, while inventory is as high now as it was in 2002, prices have only declined by about 3% across the county.

For the investors and flippers the time to pull out of the market has passed months ago, and if that is your strategy than there are other opportunities to make a quick buck. However, if you are looking to buy a home, the next nine months are in a sweet spot where you will have a lot of choices and rates that are still at historic lows. This can be translated into a buyers market.

With regard to fundamentals in Orange County, there are very few residential investors left in the county who need to get out, and employment rates are still at very low rates. Many people still commute two hours along the 91 freeway to go to work and dream of buying a home in Orange County. In addition, other than Ladera Ranch and Tellaga there are very few developments planned in the county to absorb the housing demand.

In my assessment of the area we are in a buyer’s market. Inventory will remain high for the next nine months as houses sit on the market and people who bought more than they can afford work through their challenges. During that time, the people that spend two hours a day on the freeway coming into work will take advantage of the market and absorb many of the available homes. Because there is very little new construction available and a lot of people that want to live here (my brother-in-law likens Mission Viejo and Irvine to living in park) After much of this inventory is absorbed, prices will begin their slow and steady increase once again.

Barrett Niehus