California home sales volume: August 2023 sales fizzle

California home sales volume climbed slightly higher than the prior month in August 2023, still down significantly from 2022. This follows a weak seasonal bump which struggled to build momentum during the (usually) busy spring buying season.

Just 24,900 new and resale home transactions closed escrow in California during August 2023, up 8% from the prior month and down 14% from a year earlier — a hit to all services involved in real estate sales.

Continuing the declining trend, year-to-date (YTD) sales volume is a fee-killing 27% below 2022 as of August 2023.

Critically, the classic year-over-year comparisons are short-sighted due to the uncharacteristically steep annual sales volume rise that occurred early in 2021 — a distortion fed by:

• homebuyers taking advantage of historically low interest rates,
• homebuyer fear of missing out (FOMO) due to very low inventory, and
• the financial boost from stimulus cash given to most individuals and businesses.

Instead, compare today’s sales volume to the last pre-pandemic year: 2019.

Compared to 2019 — the last “normal” year for housing before the Pandemic Economy took control — home sales volume in 2022 was 12% lower. As of August 2023, sales volume year-to-date (YTD) is a more severe 27% below 2019 — and falling.

Related chart:

California’s for sale inventory: a symptom of seller reluctance in 2023

The Pandemic bridge; an on-ramp to the advancing recession

Since 2019, home sales volume has been on a roller coaster of distorted ups and downs.

Behind the volatility was the shutdown of commerce with the onset of the 2020 pandemic followed by government action to buoy the housing market with record-low interest rates, an eviction and foreclosure moratorium and extra cash deposited directly into the pockets of renters and homebuyers.

All this federal and state action artificially drove up enthusiasm — prices — not just for real estate, but for assets of all types. Everyone was suddenly wealthier, for the moment. Tenants and buyers gave it up; landlords and sellers took it in. Predatory pricing, not value was the common denominator.

As a result, both consumer inflation — rent — and asset inflation — property prices — skyrocketed and personal savings plummeted to a decade’s low, leaving households unprepared to absorb the coming financial reversals.

We are now reaping the consequences, compounded by higher short-term and long-term interest rates. Even as the government’s stimulus measures were coming to an end in 2022, the economy was on the return path towards recession, which has now fully returned since 2020 to work its worst magic on California’s housing market in 2023, likely to linger well into early 2026. Fallout from negative equity will continue for years into the recovery as owners of assets adjust to higher mortgage and capitalization rates.

Related chart:

Why property investors need to demand higher cap rates now

Home sales in 2024 and beyond

Home sales will continue to fall back in 2024 due to:

• today’s higher mortgage interest rates, which have slashed buyer purchasing power (BPPI) by reducing the capital buyers can borrow to fund the maximum purchase price they are able to pay for property, down 17% from a year earlier and down 31% from 2019 as of August 2023;
• lower homeowner and tenant turnover as buyers face the dual dilemma of reduce mortgage funding for purchase-assist capital due to high FRM rates, and sellers’ sticky asking prices exceeding buyer capacity to pay; and
• the monthly expense of renting comparable shelter as less than a buyer’s mortgage payment.

Even as California reached a full jobs recovery from the 2020 pandemic recession at the end of 2022, another more significant economic recession is shaping up to tighten its grip on the jobs and housing markets. Watch for job losses to occur in the second half of 2023, piling on heading into 2024.

The result: home sales volume and prices won’t begin a recovery from the California downturn until the years following 2025, more likely 2026. By then, our economy will be heading into its next sustainable expansion.

In the meantime, home sales volume will continue its decline in 2024 in spite of a build up in inventory for sale, not expected to bottom out until 2025-2026.

Related article:

No one wants to sell — does that mean the renovation revolution is here?

Without the support of a steady rush of home sales since early 2022, home prices have plummeted, causing recently mortgaged homebuyers — including those who purchases with minimal down payments from 2019 through 2023 — to slip underwater at increasing frequency.

Unable to complete a traditional sale, more of these homes will head toward foreclosure. Initially, many will become real estate owned (REO) properties held by servicing agents of the remote mortgage holders. The REO issue will resolve itself by the appearance of short sales dependent on the negative equity homeowner locating a buyer, not the REO servicer. Thus, they will be sold in non-conventional sales platforms, and likely to pile up in excess due primarily to job loss.

Expect a return of real estate speculators in 2025-2026 to provide a “dead cat” bounce to bring an end to the ongoing sales slump.  A sustainable recovery will take off with the return of end user homebuyers around 2026-2027. That will produce a flipper’s profit paradise unless the long-encouraged, now state enforced coastal surge in residential construction of all types takes place.

Read more RPI analysis, see California home sales volume charts.