OC’s Rental Market Keeps Getting Hotter

BY MERCEDES SHAFFER

The housing market has been on fire for the past two years due to the combination of historically low inventory, record low interest rates, and huge buyer demand. Many have been wondering when the market will cool down, and we’re finally starting to see a shift that could make it a great time to invest in rental housing.

With the recent increase in interest rates, buyer demand for residential property has dropped significantly. New escrows in Orange County at the start of July were at 1,710, compared to 2,761 pending sales for this same time last year. That’s 61% more than this year, and the 3-year average prior to COVID there were 2,582 new escrows, which is 51% higher than this year. This is the lowest level of buyer demand we’ve seen in Orange County since tracking began in 2004.

The sharp rise in interest rates has pushed many buyers out of the market. Buyers who qualified for a $1,060,000 loan at the beginning of the year when interest rates were around 3% may only qualify for a $780,000 loan now, and it’s going to continue to worsen for buyers if the Fed keeps increasing interest rates. The decrease in buying power has caused many would-be buyers to return to the rental market, creating exceptionally high demand for rental housing. With higher-income earners increasingly entering the rental market and competing with people who traditionally rent out of necessity, the demand for rental housing is growing, which is pushing rent prices up even higher. In many cases, this is also giving housing providers a more qualified pool of renters to choose from.

Another factor contributing to an increased demand for rental housing is what seems like a shrinking supply of affordable housing in Orange County. Since 2008, there hasn’t been enough new construction to meet the demands of our growing population. Adding to the challenge, oftentimes when a small fixer-upper comes on the market, it’s acquired by an all-cash developer who immediately levels the home and replaces it with the largest possible home permitted. In the past two years especially, I’ve seen small, single-level homes get torn down and replaced with large two-story houses that sell for significantly more, thus reducing the quantity of lower cost properties available. This is especially true in coastal communities.

With buyers pulling back, the number of active listings is steadily increasing. At the start of the year, there were only 1,100 homes on the market in all of Orange County, which was the lowest level ever since tracking began 19 years ago. Today, there are over 3,800 homes on the market, and if interest rates hold steady or go higher, inventory is likely to grow. Last year, at this time, there were 2,528 homes on the market — 34% fewer than today. In 2019, there were close to 7,500 homes available. So even though supply is rapidly increasing, inventory is still significantly below pre-COVID levels.

There has also been a sharp decrease in the number of properties that have been coming on the market. In June, 11% fewer homes came on the market compared to the three-year average prior to COVID. Many sellers are concerned that they won’t get top dollar if they try to sell now, so they are choosing to wait. If you plan to sell in 2022, the sooner you put your property on the market, the better. Even though fewer properties are coming to market, the number of days on market is lengthening, inventory is steadily rising, and it’s likely to get more difficult to sell as the year progresses.

If you’re waiting for a housing crisis similar to the disaster of 2007–2008 to purchase a distressed property, we are far from anything near what the market was back then. Both short sales and foreclosures combined made up only 0.2% of all listings in Orange County.