California home sales volume in the first quarter (Q1) of 2016 was 6% higher than a year earlier. This moderate year-over-year increase follows the more rapid increase seen in 2015, and the rise continues to decelerate each month. Home prices also continued to rise during Q1 2016, up 8% from a year earlier. The annual price rise has remained steady over the past two years, at an annual increase of under 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 in 2017. Further, mortgage rates are expected to increase around 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 June 23, 2016. Original copy posted March, 2014.

Chart update 06/23/16

Q1 2016 Q1 2015
Annual percent change
Home sales volume 92,843 87,890 +6%
Home price index
235 218 +8%

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 2016, home sales volume was 6% above where it was a year earlier. Thus, home prices will continue to rise through much of 2016. Another factor not displayed on the chart is the coming rise in fixed mortgage rates, expected to arrive around late-2016 or early-2017. Once mortgage rates rise, expect home sales volume to trend downward within six months. Prices will fall in 2017, 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.