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California Home Sales Volume continued its downward plunge in July 2022, marking the fourth consecutive month of declining sales, atypical for the annual sales cycle.
Sales volume typically moves from an annual low in January to a mid-year high. Therefore, another month of declining sales volume is ringing alarm bells for sellers – and future prices – an alarm bell has rung time and time again in previous first tuesday
32,000 new and resale home transactions closed in escrow California in July 2022. The number of homes sold in July was 20% lower than the previous month and 18% lower than the previous year, or 16,400 fewer sales. From a historical perspective, this is the lowest July sales volume since 1995.
Year-to-date (YTD) Home sales volume is a good predictor of annual sales volume. In July 2022, the year-to-date sales volume is 16% lower than the previous year.
The rapid pace of sales recorded in California since 2020 began to decline in the second half of 2021, continuing into 2022. And yet, due to the unusual increase in annual sales volume that occurred in early 2021 – fueled by buyers’ fear of missing out (FOMO) on low inventory and home buyers taking advantage of historically low interest rates and stimulus – typical year-over-year comparisons aren’t as useful today.
Instead, consider comparing today’s sales volume to the last “normal” year we had: 2019.
Here we see the trajectory of home sales volume in 2019 (the black line) alongside the sales volume so far in 2022 (the red line). The dotted lines show the abnormal years of 2020-2021, which have been distorted by Pandemic economy.
While sales volume started 2022 at a faster pace than 2019, after peaking in March, it quickly declined to fall below 2019 levels. So after two years of erratic home sales volume , expect sales volume in 2022 to end the year slightly below 2019, tempered by rising interest rates, a still-recovering job market and more sober homebuyers .
Pandemic-era government efforts to close the gap are over
On an annual basis, 2021 ends with 536,600 annual home sales in California. This is 97,400 more home sales than in 2020, an annual increase of 22%.
However, this increased performance follows several years of flat declining sales volume (the bumpy tray recovery after the foreclosure crisis and financial crash of 2009).
Editor’s note – Despite recent gains, the strong year 2021 for home sales volume was still 29% lower than the record year for sales volume in 2005.
Why have home sales volume and home price increases in 2021 been so strong compared to recent years?
The federal government has introduced a number of measures to create a bridge for consumers, to get them from the time of the 2020 recession until the end of the pandemic response. The result was a buoyant housing marketwith low interest rates and extra liquidity providing a launch pad for tenants, buyers and investors to make the real estate leap.
Government measures included:
- keeping artificially low interest rates in 2020-2021, held back by the Fed’s purchase of mortgage-backed bonds (MBBs) and a zero rate on its benchmark interest rate;
- a moratorium on evictions and foreclosuresthat allowed renters and landlords unable to make housing payments to stay in their homes (and kept those homes off the market, keeping inventory under control);
- individual stimulus checkswhich fueled consumer spending not just for those who lost their jobs during the 2020 recession, but for consumers of all incomes;
- a continuous pause on student loan repayments, which also boosted consumer spending, supporting the economy; and
- establish and extend the Paycheck Protection Program (PPP) and the Economic Disaster Loan Grant Program to help small businesses stay afloat at the onset of the pandemic.
All of this federal action has helped drive up enthusiasm (and prices) not just for real estate, but for assets of all types.
However, while the government has created a bridge to carry consumers through the pandemic-era recession, the bridge has also delayed the inevitable. As government stimulus was winding down, the economy was on its way back to recession.
Press release: Buyer Purchasing Power Index (BPPI) drops to new low in Q2 2022
California home sales in 2022 and beyond
Home sales will continue to decline in 2022, due to:
- significantly higher mortgage interest ratewhich hurt buyers’ purchasing power, down 26% year-on-year in July 2022;
- The expiry in 2021 of the moratorium on foreclosureswhich has resulted in a backlog of forced sales in the market, creating a further drag on house prices and discouraging buyers;
- lower owner turnover as the FOMO buyer turns to restraint in the face of rising rates and rising inventories; and
- the ongoing recovery of job losses of 2020, of which more than 165,000 are still absent from the labor market in June 2022.
As the Fed continues its measures to calm inflation, the second act of the 2020 recession has technically (still unofficially) arrived after two consecutive quarters of decline Gross Domestic Product (GDP) in 2022. As evidenced by another month of historic sales volume losses, this undeclared recession is already taking its toll on the housing market.
Watch for the decline in sales volume which will continue in 2022-2024. In turn, prices will return to the average price trend line by 2025. When prices fall, recent buyers will soon find themselves underwater, weighed down by negative equity. Unable to complete a traditional sale, some of these homes will head for foreclosure and become land ownership (REO) Properties.
Then, expect a return of property speculators to provide a boost in the coming crisis, with a sustained recovery taking off alongside the return of end-user buyers, around 2026-2027.
How to prepare for the REO resurgence
To Read more on home sales trends and the first tuesday analysis, see graphs of California home sales volume.