California home sales volume broke another decade low in January 2023

After a year of steadily decreasing sales, California home sales volume started 2023 with the lowest numbers since the Great Recession.

Just 14,800 new and resale home transactions closed escrow in California during January 2023. The number of homes sold in January was significantly below the prior month and a devastating 40% below a year earlier, amounting to 9,800 fewer sales in this single month alone.

Sales volume usually rises from an annual low point in January to a peak mid-year. But in 2022, home sales volume peaked early, in March, followed by a premature peak in home prices just three months later, in June.

In total, 2022’s annual home sales volume numbers were 24% below 2021. 

However, due to the uncharacteristically steep annual sales volume rise brought on by the pandemic in early 2021 — homebuyers fueled by their fear of missing out (FOMO) due to low inventory and pulled by historically low interest rates and stimulus boosts — the typical year-over-year comparisons are distorted by a series of one-off events and are not as useful today. Instead, consider comparing 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 hold — 2022 home sales volume was 12% lower. In the single month of January 2023, sales volume was a weightier 25% below 2019.

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Government efforts to bridge the pandemic-era gap are spent

At an annual rate, 2021 ended with 536,600annual home sales in California, compared to just 330,900 during 2022. 2021’s inflated sales numbers were a significant 97,400 more home sales than took place in 2020, amounting to a 22% annual increase.

However, this heightened performance follows several years of flat-to-down sales volume (the bumpy plateau recovery following the 2009 foreclosure crisis and financial crash). Thus, 2021 may be viewed as a brief interlude in the state’s long history of tepid sales volume — not the norm.

Editor’s note — Despite significant gains, 2021’s strong year for home sales volume was still 29% below the peak year for sales volume in 2005.

Why were 2021’s home sales volume and home price increases so strong compared to recent years?

The federal government introduced a number of measures to create a bridge for consumers, to get them from the moment of the 2020 recession through to the end of the pandemic response. The results include a buoyed housing market, with low interest rates and extra cash providing a launching pad for renters, homebuyers and investors to take the real estate plunge.

The government’s steps included:

• keeping interest rates artificially low in 2020-2021, held down by the Fed’s purchase of mortgage-backed bonds (MBBs) and zero-level rate on its benchmark interest rate;
• an eviction and foreclosure moratorium, which allowed renters and homeowners unable to make housing payments to remain in their homes (and kept these homes off the market, keeping inventory in check);
• individual stimulus checks, which fueled consumer spending not just for those who lost their jobs during the 2020 recession, but for consumers across the income spectrum;
• an ongoing pause on student loan payments, which also enabled more consumer spending, propping up the economy; and
• instituting and expanding the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan grant program to help small businesses stay afloat at the pandemic’s outset.

All this federal action helped drive up enthusiasm (and prices) not just to buy real estate, but to buy all classes of assets.

However, while the government created a bridge to carry consumers across the pandemic-era recession, the bridge merely delayed the inevitable. While the government’s stimulus measures were coming to an end, the economy headed down the return path towards recession, which has now fully arrived to clear out pandemic price increases in California’s housing market.

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California home sales in 2023 and beyond

Home sales will continue to fall back through the rest of 2023—minus a brief seasonal spring bump in month-over-month sales — due to:

• significantly higher mortgage interest rates, which have slashed buyer purchasing power, down 31% from a year earlier as of December 2022;
• sticky resale prices as sellers resist the consequences of higher long-term interest rates and capitalization rates ;
• lower homeowner turnover as buyer FOMO turns to restraint in the face of rising FRM rates and increasing inventory; and
• the broader economic recession, anticipated to reduce employment in 2023.

Even as California reached a full jobs recovery from the 2020 recession at the end of 2022, another more significant economic recession is tightening its grip on the jobs and housing markets. Watch for job losses to pile on in 2023. In response, home sales volume and prices won’t begin a recovery from the present downturn until the years following 2025, at which point the economy will be heading into its next sustainable expansion.

In the meantime, home sales volume will continue trailing in 2023. 2024 sales volume will depend on how steeply prices drop in 2023 — and the extent to which FRM rates fall back in 2024.

Without the support of a steady rush of home sales, home prices now plummeting from their May 2022 peak will cause recently mortgaged properties to slip underwater.

Unable to complete a traditional sale, more of these mortgaged homes will head toward foreclosure and into lender portfolios of real estate owned (REO) properties.

Expect a return of real estate speculators in mid-2024 to provide a “dead cat” bounce during the ongoing sales slump, with a sustainable recovery taking off on the return of end-user homebuyers around 2026-2027.

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To read more about home sale trends and firsttuesday’s analysis, view California’s home sales volume charts.