ORANGE, Calif. — If you plan to buy a home in Orange County anytime soon, wait, said Chapman University economists.
Mortgage rates could go up as high as 7%, and median home prices in Orange County — which currently hover above the $1 million mark — expect to drop 12% next year.
“We’re at the peak,” said Jim Doti, president emeritus and professor of economics. “Four quarters from now, we’re forecasting [a median home price] of $891,000, which is a drop of 12%.”
Doti and other economists from Chapman presented their findings at the university’s most recent economic forecast released last week.
The forecast offered grim news of the current state of the economy and beyond. With inflation rising, the federal reserve withdrawing money from the U.S. economic system and other factors, Chapman economists predict a recession.
“We believe that a prospect of a recession is virtually certain,” said Doti. “It’s not a matter of ‘if,’ but ‘when.’”
Doti pointed to the feds curbing spending by aggressively increasing interest rates in recent months and letting bonds retire — including T-bonds and mortgage back securities — by about $50 billion per month and up to $100 billion per month.
Doti believes the move will place additional upward pressure on mortgage rates and downward pressure on the U.S. money supply and future spending.
Doti also expects the stock market to drop 33% conservatively. In every recession since the 1970s, Chapman economists said the U.S. stock market peaked six months to one year before its start. Doti said the stock market is currently down 21% from its high in December. If the forecast is correct, the market could drop another 16% once a recession occurs.
When share prices begin to climb, the bull market won’t happen until the recession happens, and the federal reserve stops and starts to reduce increasing interest rates, Doti added.
Chapman economists believe the recession will likely occur at the beginning of next year and possibly as early as the end of this year.
Locally, Orange County posted strong job growth, adding more than 188,000 jobs in the past year, 79,000 of which were in leisure and hospitality — a sign that the travel industry is rebounding.
However, the county still lags far behind other cities in luring and attracting the high-value-added advanced industry job sector.
Plus, the county’s population continues to decline. Chapman officials said the county had lost 5,000 to 10,000 in population annually in 2019, 2020 and 2021.
The drop in population will eventually mean a reduction in housing demand, said Doti.
“People just can’t afford it anymore, so that’s going to obviously have a significant impact on housing demand.”
Orange County’s current median home price is about $1.01 million. But that expects to drop.
Mortgage rates began to creep up starting in the third quarter of 2021, and as they climbed, housing appreciation began to stall.
“As we see mortgage rates continuing to increase, our forecast looks to be right on. In fact, if anything our forecast might be a bit too conservative, that mortgage rates could actually be higher than the 7% we forecasted,” said Doti. “If that inverse relationship continues, higher mortgages will lead to lower appreciation and depreciation and lower housing prices.”
Doti pointed to some signs in the housing market, including the average number of days a house is sold.
At its peak earlier this year, the average home stayed on the market for 19 days before it sold. As mortgage rates rose within a couple of months, the average day jumped to 45 days.
“That 45 days is higher than anything we’ve had since before covid hit,” said Doti. “This is a sign, obviously, that things are slowing down.”
Doti advises those looking to buy a home in the county to wait. The Chapman forecast calls for a 12% decline in the median home price from $1.01 million in mid-2022 to $891,000 by mid-2023.
Despite a prospective buyer likely having to borrow at a higher mortgage rate, a 12% drop in price would allow them to save money in the long run and the ability to refinance later when interest rates go down.
“Bottom line, probably wait,” Doti said.