California home sales volume continued to slow in the first quarter (Q1) of 2017, just 3% higher than a year earlier. This small year-over-year increase follows the more rapid increase seen in 2015, which began to decelerate in 2016. Home prices also continued to rise at a slower pace during Q1 2017, up nearly 7% from a year earlier. The annual price rise has slipped very slightly the past two years, averaging an annual increase of less than 10% since mid-2014.

Looking forward, while home sales volume decelerates, the annual increase in pricing will continue for a few months yet. It takes about 9-12 months for prices to react to sales volume movement, so price increases will begin to slow more dramatically in late-2017 and decrease in 2018. Further, mortgage rates began to increase in late-2016. With the resultant decrease in buyer purchasing power, sales volume and pricing will feel more downward pressure while homebuyers adjust to new interest rates.

Updated May 12, 2017. Original copy posted March, 2014.

california-home-sales-pricing-annual-change-q1-2017Chart update 05/12/17

Q1 2017 Q1 2016
Annual percent change
Home sales volume 95,900 92,800 +3.3%
Home price index
248 235 +6.9%

Sales volume projects home prices

Many indicators go into forecasting home prices, including:

Of these, home sales volume movement has the most direct impact on tomorrow’s home prices.

The chart above tracks movement in home prices and the corresponding impact on home sales volume movement roughly nine months hence. Movement in home sales is depicted in the chart above by plotting the percent change from one year to the next. We use a six-month moving average to smooth out month-to-month fluctuations caused by seasonal pressures.

In Q1 2017, home sales volume was 3% above where it was a year earlier (less than the 6% annual increase experience a year earlier). Thus, the home price rise will slow throughout 2017, when it will turn negative. Another factor not displayed on the chart is rising fixed mortgage rates, which began in late-2016. This interest rate action has pulled the home sales volume to trend downward. Prices will fall in going into 2018, 9-12 months after home sales volume’s steady decrease.

Forecasting a recovery starts with volume

The drawn-out recovery following the 2008 recession had many false starts over the past five years. First, 2009 saw home sales volume rise for the first time since peaking in 2004. However, the rise was artificially stimulated by the federal government’s first-time homebuyer tax subsidies. Real demand was not yet present, thus sales volume fell back in the following year.

All the same, 2010 saw the first slight increase in home prices since the peak in 2005. Home sales volume fell in 2010, preceding the corresponding drop in home prices in 2011.

Another rise and fall came in 2012, as speculators began their occupation of California’s housing market. By 2013, the housing market was dominated by speculators. This caused home prices to rise without the support of home sales volume. Thus, as speculators continued their swift exit from the market in 2014, price increases leveled off and continue today at a 9% annual increase.

The foundation for a true recovery isn’t sales volume

Home sales volume movement is a good way to predict home price movement. But it’s a mechanical correlation – the relationship between sales volume and prices doesn’t tell you how stable the respective changes are. To predict volume and price stability, you have to look at jobs.

Since homeowners and renters require an income to make housing payments, California’s jobs market is a reflection of its housing market. Therefore, look to the jobs recovery for a recovery in home sales volume, followed by prices.

Jobs finally returned to their pre-recession level in California in 2014. However, when accounting for population increases, jobs won’t reach a full recovery until much later, likely 2019.  Sales volume will take off in anticipation in 2019, followed by home prices.