After a year of constantly decreasing sales, California home sales volume ended 2022 with a resounding correction in process.

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

19,300 new and resale home transactions closed escrow in California during December 2022. The number of homes sold in December was slightly below the prior month and a devastating 44% below a year earlier, amounting to 15,200 fewer sales in this single month alone.

In total, 2022 home sales volume was 24% below the prior year.

For reference, the rapid pace of sales experienced in California during the pandemic began to taper off in the second half of 2021, hastening the correction in 2022.

However, due to the uncharacteristically steep annual sales volume rise that occurred early in 2021 — fed by buyer fear of missing out (FOMO) on low inventory, homebuyer belief historically low interest rates gave them an advantage, and cash stimulus boosts — the typical year-over-year comparisons are not useful today. More realistically, consider comparing today’s sales volume to the last pre-pandemic year: 2019.

2022 home sales volume was 12% lower than 2019 — the last “normal” year for housing before the Pandemic Economy took over.

Thus, after two years of an artificial surge in home sales volume, sales volume in 2022 ended the year below pre-pandemic levels, harnessed by rising interest rates and restrained homebuyers.

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The government’s pandemic-era efforts to bridge the gap are spent

At an annual rate, 2022 ended with 330.900 annual home sales in California, compared to 536,600 during 2020. 2021’s inflated sales numbers were a significant 97,400 more home sales than closed in 2020, amounting to a disruptive 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 needs to be viewed as a brief interlude in the state’s long history of tepid sales volume.

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 increases in home sales volume and home price 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 2020 recession began through to the end of the pandemic response. The result was 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 for real estate, but for assets of all types.

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 was on the return path towards recession, which has now fully arrived to do damage to California’s housing market in 2023.

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California home sales in 2023 and beyond

Home sales will continue to fall back in 2023, due to:

  • significantly higher mortgage interest rates, which have slashed buyer purchasing power, down 31% from a year earlier as of December 2022;
  • lower homeowner turnover as buyer FOMO turns to restraint in the face of rising rates and increasing inventory; and
  • the broader economic recession, anticipated to bring job losses 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 beginning in January 2023. 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.

Watch for home sales volume to continue trailing in 2023. 2024 sales volume will depend on how steeply prices drop in 2023. Without the support of a steady rush of home sales, home prices are plummeting from their May 2022 peak, causing recent mortgaged homebuyers to slip underwater.

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

Expect a return of real estate speculators in 2024 to provide a “dead cat” bounce during the ongoing sales slump, with a sustainable recovery taking off with 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.