High prices hold back California home sales volume

38,000 new and resale home transactions closed escrow in California during March 2016. In step with the seasonal sales cycle, sales volume was up significantly from the prior month. It was also 3% higher than a year earlier. While this is an improvement over last year, the rise has decelerated in recent months, signaling sales volume will decline to 2015 levels by mid-2016.

2015 ended with 450,700 home sales in California. This is 35,400, or 9%, more sales than took place in 2014. This is just above 2013 sales volume. For perspective, the number of homes sold in 2015 is still 303,203, or 40%, below peak sales volume experienced in 2005.

The number of homes sold year-to-date is 6% higher than 2015 as of March 2016. Sales volume is likely to continue to pick up in the first half of 2016 as job numbers continue to grow, to fall back in the months following the inevitable fixed rate mortgage (FRM) rate increase, expected as early as the second half of 2016.

Updated May 5, 2016. Original copy posted March, 2009.

Chart 1

California-Home-Sales-Volume

Chart update 05/05/16

Mar 2016 Feb 2016 Mar 2015
Southern CA 20,449 15,149 20,011
Northern CA
17,583
12,825
16,969

CA Total

38,032 27,974 36,980

The above chart tracks the home sales volume of single family residences (SFRs) on a month-to-month basis. Sales volume includes the sale of all residential resales and new homes in California, including new homes sold directly by builders.

Home sales vary from month-to-month for a variety of reasons, most significant being homebuyer demand. This demand is influenced by several factors constantly at work in California’s homebuying market, including:

Seasonal differences in annual sales volume

It’s normal for home sales volume to rise in the first half of the year and fall after June, generally speaking.

Chart 2

HomeSales-BellCurve-Chart

Chart update 12/10/2015

Chart 2 shows average home sales as experienced from 2011-2015. As depicted, the most homes are regularly sold each year in June. Another small increase takes place in December, as homebuyers seek to wrap up their financial activities before the end of the year.

Therefore, real estate professionals are not to worry when they hear of falling sales volume in the latter half of the year. This is a normal seasonal progression. What to watch for is year-over sales comparing a month or other period (such as year-to-date) this year with the same month or period last year.

A very long recovery for home sales volume

Annual real estate sales numbers since the Great Recession of 2008 suggest the upcoming years through 2017 will be characterized by the same continuing bumpy plateau in home sales volume we have experienced now for eight stagnating years. As a rule, current market action, whether up or down, is reflected first in sales volume, followed by prices, and both fluctuate from month to month mostly going in opposite directions or just standing still.

Chart 3

California-annual-Home-Sales-Volume
Chart update 02/02/16

2016 forecast
2015 2014 2005 peak
NorCal 225,000 213,933 196,334 398,178
SoCal 250,000 236,740 218,986 355,698
Total 475,000 450,673 415,320 753,876

To set the stage for a forward look, a review of sales volume in the recent past is helpful:

  • Mid-2005 saw sales volume peak for all types of real estate in California, with nearly 754,000 homes sold that year;
  • Early 2006 produced both the peak in sales prices and a precipitous further decline in sales volume. Nearly 30% fewer sales were recorded in 2006 than in 2005;
  • In 2007 sales volume dropped another 30%;
  • 2009 sales volume was artificially higher than anticipated after bottoming in 2008 due to subsidy-induced purchases and speculators jumping on the momentum, but remained 40% below the 2005 peak year;
  • 2010 saw a decline from the year earlier in both sales volume and prices;
  • 2011 increased slightly in sales volume while decreasing in sales prices, a normal price adjustment condition;
  • 2012 saw sales volume increase marginally and home prices jump significantly by year’s end, supported primarily by massive speculation;
  • 2013 home sales volume stagnated, while home prices continued to increase rapidly, not a good sign for the immediate future; and
  • 2014 saw home sales volume decrease throughout the year, ending the year 7% below 2013.
  • 2015 ended 9% higher than 2014 — in other words, just about level with 2013. [See Chart 4]
  • 2016 will initially see sales volume increase, but when FRM rates jump, likely mid-2016, sales volume will slow, ending the year flat to slightly up over 2015.

Chart 4

California-home-sales-year-to-date

Chart update 05/05/16

Mar 2016 Mar 2015 Mar 2014
Home sales volume
year-to-date

93,023 87,890 84,435

2016 home sales volume is 6% higher than 2015, year-to-date, as of March 2016. This is also above 2014, though slightly below 2013. However, 2016 has just started, thus this percentage will likely fluctuate in the coming months as a trend develops.

Sales volume will not increase significantly until after 2017, due to:

  • fewer participating first-time homebuyers than normal;
  • lower homeowner turnover to buy an upgrade or relocate due to continued negative equity and delayed retirement; and
  • static turnover in rental occupancies.

Much of these disadvantages are due to the jobs recovery which has been dragged out for eight years now, a confidence issue, and is pronounced by wage increases below the rate of consumer inflation. California finally regained all jobs lost in the 2008 recession in mid-2014, but has yet to return to pre-recession employment levels after considering the 1.1 million working-aged population increase. At the current recovery pace this will occur in 2019.

Short sales, real estate owned (REOproperty resales and speculators have contributed to sales volume distortion over the past few years. Conventional positive-equity resales by owner-occupants were the exception, sometimes reminiscently called standard sales as opposed to short sales. As prices rise, move-up homeowners will return to the market to sell and concurrently buy a more suitable replacement home.

Further, as of Q2 2015, 7% of California mortgaged homeowners were still underwater. Thus, turnover by this chunk of owners is restricted.  These homeowners cannot sell and relocate to purchase another home because their homes are worth less than the debt encumbering them. To rid themselves of the home and the debt, they have to endure damaged credit resulting from a short sale or foreclosure. The desire to avoid this embarrassment takes most of these 7% homeowners out of the home buying market for years.

Home sales in the coming years

The forward trend in California home sales is mixed for both buyers and seller. Homebuyer income is going further and doing more than anytime during the past 15 years due to increased borrowing capacity brought on by low interest rates (even though they rose mid-2013 to cut back funding by 10% from one year prior, but dropped to fuel sales in 2015). In fact, the Buyer Purchasing Power Index (BPPI) went negative in June 2013 and bounced back to zero in September 2014 – this momentarily stalled home price expectations.

In December 2015, the Federal Reserve (the Fed) committed itself to raise short-term interest rates in order to keep a lid on the recovery (as they did in both 1984 and 1994 midway through those recoveries). This upward rate move by the Fed (and the bond market) will instantly be reflected in ARM rates, and eventually trickle into higher mortgage rates, likely around mid-2016. Higher FRM rates will promptly trend real estate sales volume down and some 9-12 months beyond prices will slip. As prices start to decrease, expect the short-term rate to decline in the 2017-2018 period which will slow and put an end any downward turn in real estate sales volume and the economy.

first tuesday forecasts home sales volume will return to 2006 levels around 2020-2021. The peak sales volume last seen in 2004, inflated by speculator acquisitions and excessive mortgage money, is unlikely to return for decades, when interest rates cyclically peak.

Relocating Baby Boomers going into retirement later this decade will be the primary propelling force in both selling homes and buying replacements beginning around 2019. Their Generation Y (Gen Y) children will add to the sales volume at the same time as they find jobs at better pay levels and become first-time homebuyers. Gen Y influence will peak in sales volume at the end of this decade as they complete their shift from renting to owning.

Once Californians feel the effects of two or three years of healthy employment growth, their confidence about the future will improve. They will once again be willing to invest in the economy since the expectations for tomorrow are projections based on yesterday’s most recent experience. Only then will occupying homebuyers – end users – return in sufficient numbers for sales volume to swell significantly.

In 2018, sales volume will begin to pick up in earnest, peaking in 2019-2021. Employment and labor force participation will have reached beyond its 2007 peak, and grow quickly. Then, California will once again see home prices jump beyond the rate of consumer inflation. Mortgage lenders with an eye for excess profits will then begin to loosen their lending standards to whatever extent federal regulators permit or lawyers divine. The memory of the grim mid-2000s will be politely pushed aside, and mistakes will be repeated by all participants – lenders, builders, brokers and buyers.

Favorable market conditions now at work

Several favorable market factors currently support increasing sales volume:

  1. A steady 3% annual increase in the number of new jobs;
  2. A more reasonable (though still rising) price trend as we start 2016;
  3. Slowly rising consumer confidence and spending; and
  4. the recapitalization of the private mortgage insurers to eventually replace (or fully compete with) government guarantees of home mortgages.

Trends to be concerned about

However, many unfavorable market conditions restrain the rise of home sales volume:

  1. the weakest homebuyer demographics in 15 years;
  2. failed savings for a down paymentas high rents squeeze potential first-time homebuyers out of saving;
  3. buyer borrowing power no longer enlarging the funds they can borrow as interest rates inevitably rise, reducing funding for purchase-assist financing and dampening property prices;
  4. the public’s increasingly anti-business and pessimistic attitude about American economics, wealth inequality and national politics no matter the outcomes; and
  5. tightened loan standards as lenders are forced to apply forgotten fundamentals of sound mortgage lending practices (20% down payment on non-FHA/private mortgage insured loans, lower income ratios, risk-free credit scores and full documentation of income, funds and collateral value).

The competitive broker

What’s a broker to do until home sales volume takes off?

SFR brokers and agents might consider adding SFR-related services to supplement their income. Those who do add related services will restructure their practice as “all-service brokers.” Transaction-related services will be integrated into their office operations to maintain solvency and grow.

These services include:

  • escrowing their in-house transactions under the broker’s license;
  • entering into or expanding property management services;
  • negotiating equity purchases for investors from underwater owners on the chance of a short sale discount or who have a positive equity;
  • specializing in sales and leasing of a particular type of commercial property, other branch office locations and alternative marketing approaches (aside from social media);
  • providing mortgage loan broker services for business-investor loans made by private lenders and secured by the borrower’s residence (no mortgage loan origination (MLO) endorsement required);
  • arranging carryback financing and the take over/assumption of existing mortgages, and buying and selling those carryback trust deed notes;
  • negotiating options to buy, or lease with option to buy when inventories expand as the shadow inventory of speculators returns to be sold;
  • exchanging properties with equity to help owners relocate their wealth held in real estate tax free; or
  • using barter credits in lieu of greenbacks, etc.

Prudent brokers will insist their prospective buyers commit to exclusive representations by the broker and agent to locate a home (or other property). By signing an exclusive right-to-buy listing agreement, buyers commit to employ brokers and agents just as sellers commit to employ brokers and agents, the obverse side of the same employment coin. This will ensure time spent with a buyer produces a closing and a fee.

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29 Comments

  1. Dan said:

    Century 21 is taking the approach of herding prospects into a large room and closing the sale before they leave. The postcards they are mass mailing talk about renting / buying and give the impression they are being aggressive about getting loans approved at low interst rates.

  2. Michelle said:

    The prices are at the top again and no one can afford to buy or rent. We are clearly at the top and the bubble is going to have to burst AGAIN. It’s a cycle – we were here with houses 5-6 yrs ago, everyone was in foreclosure and now those houses are selling for 40-60% of their value 5 yrs ago. It’s insane and can’t be sustained. People making 6 figure+ incomes can’t afford to buy or rent. Something has to give – oh and the stock market bubble has burst so it’s going down. Don’t buy now – wait – the rental market will have to give as well because no one can afford the outrageous rents

    • lura said:

      I totally agree with you, first time home buyers will never be able to afford to buy with this market.

  3. Candice said:

    What about getting a proposition passed banning foreign investors from purchasing residential real estate in California???? Austrailia and Norway are already doing so. Given the limited amount of housing the Bay Area has, I think this would be an excellent solution. Why are we selling the American dream of owning a home to foreign investors!? Would anyone vote for this ban???

    • Cliff said:

      I agree, but I just don’t know how much they impact this frenzy…I think it’s more in the tech over valuation. Once the stock cools down, it should bounce back.

  4. Alyr said:

    Typical California attitude. Believing that jobs are increasing. Did you even look at the jobs report they are all crappy jobs flooding the market and all the good jobs are leaving

  5. Vickie said:

    Is it true you could buy a home if your credit is around 610. I have proof of rent for the last 3 years at 2600a month

  6. ann meyers said:

    Can you be any more specific about the effect of rising interest rates on prices ‘expected’ in 2016? In other words buying now in 2015 would one expect to be underwater in a few years depending on the change in rates?

    • ft Editorial Staffft Editorial Staff said:

      Ann,

      Thank you for your inquiry! Historically speaking, when mortgage rates rise homebuyers become discouraged and sales volume declines, usually within six months. As sales volume falls back, home prices likewise fall within the following 9-12 months. Therefore, first tuesday expects pricing to decline in 2017.

      However, to answer your question about underwater homes, prices aren’t expected to fall very far in 2017, nor will they be down for long. Economic action is pointing towards a solid recovery beginning in 2018, and by that point we will likely be heading into our next housing boom, expected to occur in 2019-2021. Therefore, if a home goes underwater due to decreased home prices in 2017, it will likely regain positive equity quickly.

      Please read more about the anticipated rise in mortgage rates here: Why fixed mortgage rates won’t rise (yet), despite Fed action. You may also read specifics about our forecast for the real estate market here: California real estate almanac: past and future.

      Regards,
      ft Editorial

  7. Dave said:

    Are there any granular data regarding shadow inventory? How much percentage are true speculator or flippers, and how much are for parking their money as safe investment comparing to their home country, ie. China? What about the institutional purchase of foreclosure properties? do they rent out those properties, or resell at a later time,? These unknown forces have disrupted California real estate market for the last few years and partially blame for inflating home prices.

  8. Pingback: Home sales volume rides the bumpy plateau - Nationwide Real Estate Executives

  9. M said:

    Does the analysis reflect any concern for the impact the California drought may have on housing activity / home prices over the next several years?

    • Mr. Thomas Orchard said:

      Can’t believe that we are in the worst threatening situation in the state’s history and this article refuses to recognize that buyers will not purchase a home if:
      They have much higher water bills
      Water restrictions
      Water penalties
      Water brown outs
      or no water at all
      What is the world does the author think is happening all over the state. There is only one last chance and that is El Nino this winter. If that doesn’t yield mega results in rain and snow, then all bets are off and so is California because it most likely is in a mega drought.

      • REC said:

        I’ve thought about the drought effect…and I’m torn between two scenarios: One, the state will suffer economically, and eventually have a negative impact on real estate prices. Two, cities will heavily restrict growth because of our severe drought. Scenario 2, to me, is the most likely, and that would DECREASE inventory compared to population growth leading to even higher R/E prices. While it is true that water is a tremendous issue, I see people willing to let their lawns go completely dead and perhaps skip showers to live here in Southern Cal…it’s crazy, and it probably always will be. Then again, there was the collapse of 2008. Who is sage enough to figure this out?

  10. Frank Zak said:

    Absolutely wrong analysis. I have been a broker
    for 34 years in Los Angeles. This post is so far removed
    from reality I could write a book tearing it apart.

    Why don’t you people give up forecasting real estate prices ?

    You have NEVER BEEN RIGHT. NEVER.

  11. Krystyna Baty said:

    Thank you for this informative, in depth analysis. This data is very helpful when trying to put current local market data in perspective.

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  14. greg galloway said:

    Its all about location. Here in the Bay Area, housing sales are out of control once again with multiple offers and homes selling within days of listing. I’d like to see the chart for this area specifically. Of course other (inland) areas suffer massively and will continue until as you said, employment expands greatly and regularly. But there’s magic in the Bay Area and specific smaller locations.

  15. stella song said:

    Thank you very much for the information on house market trend as well as brokers and real estate agents fall.

    stella song

  16. Stan Milwee said:

    You list your source as MDA DataQuick. If you will check with DataQuick, you will find they are no longer owned by MDA. It’s always nice to properly reference your sources.

    • ft Editorial Staffft Editorial Staff said:

      It is indeed! Thanks for bringing this change to our attention. We’ll see to it that our attributions are updated accordingly.

  17. Susan Carter said:

    My thanks to Bradley for the research and information provided in the article. Historic trends lend themselves to greater understanding of the factors involved in the movement of markets. I went straight from this article to investigate the “charts” section. Good information–leads to good insight. Susan Carter

  18. Real estate short sale said:

    It seems at this point that the trend was downward but since January things have picked up. When the interest rates were lowered the housing market jumped a bit and since has leveled off just as interest rates have.

  19. Ed Reisinger said:

    ft Editorial Staff:
    Thanks for the invaluable lists of important facts that will direct the business decisions of Real Estate Brokers over the coming years. All of your journals are spot-on subjects for surviving this current R. E. Cycle. But this journal gives the lists that a Broker will need when making a business plan. I am studying for my Broker’s Test now.
    Sincerely, Ed Reisinger

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