California home sales volume inches forward in March 2023

After a year of steadily decreasing sales, California home sales volume is struggling without a rebound in 2023.

Just 23,800 new and resale home transactions closed escrow in California during March 2023. The number of homes sold in March was slightly higher than the first two months of 2023 — not exactly impressive, since January 2023 saw the lowest sales volume since the Great Recession of 2008.

Further, sales volume in March 2023 was a devastating 33% below a year earlier, amounting to 11,700 fewer sales in this single month alone. That’s around $350 million in lost brokerage fees statewide just in March 2023.

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

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

For reference, following two pandemic years of irregular increases in home sales volume, sales volume in 2022 ended the year below pre-pandemic levels, driven down by upward trending mortgage rates, intimidated homebuyers, and sticky-price sellers. 

Critically, the classic year-over-year comparisons lack usefulness today due to the uncharacteristically steep annual sales volume rise that occurred early in 2021 — a distortion fed by buyer fear of missing out (FOMO) on low inventory and homebuyers taking advantage of historically low interest rates and stimulus boost. 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 over — home sales volume in 2022 was 12% lower. As of March 2023, sales volume year-to-date (YTD) is a weightier 20% below 2019.

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Property prices and cost of capital test buyer readiness; Monthly Statistical Update (May 2023)

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

At an annual rate, 2022 ended with just 330,900 annual home sales in California, compared to the soaring sales number of 536,600 for 2021, a significant 68,200 more home sales with a 19% increase over the last normal year of 2019.

However, this heightened pandemic performance follows several years of flat-to-down sales volume (the bumpy plateau recovery following the 2009 foreclosure crisis and financial crash). Thus, view 2021 as a brief interlude in the state’s recent 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 home sales volume and 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 conditions. 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 for-sale inventory abnormally low);
• 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, further 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 artificially drove up enthusiasm — prices — not just for real estate, but for assets of all types. Everyone was wealthier, for the moment.

We are now reaping the consequences. While the government created a bridge to carry consumers across the pandemic-era recession, this overpass merely delayed the inevitable return of the 2020 recession. While the government’s stimulus measures were coming to an end, the economy was on the return path towards recession, which has now fully returned to do its worst on California’s housing market in 2023.

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Buyer purchasing power determines home prices — always

 California home sales in 2023 and beyond

Home sales will continue to fall back for the remainder of 2023 with time out for a brief and very modest seasonal spring bump in month-over-month sales — due to:

• significantly higher mortgage interest rates, which have slashed buyer purchasing power by reducing the capital buyers can borrow to fund the maximum purchase price they can pay for property, down 23% from a year earlier as of March 2023;
• lower homeowner and tenant turnover as buyers face the restraint on borrowing purchase-assist capital due to rising mortgage rates and as their FOMO melts away with 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 after mid-2023. The result: home sales volume and prices won’t begin a recovery from the California downturn until the years following 2025. By then, our economy will head 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 this year; if it’s fast down, then expect an early bottom and a fast recovery for home prices. Without the support of a steady rush of home sales since early 2022, home prices have plummeted, causing recent mortgaged homebuyers to slip underwater at increasing frequency.

Unable to complete a traditional sale, more of these homes will head toward foreclosure.  Many will become real estate owned (REO) properties held by servicing agents of the remote mortgage holders. Thus, they will be sold in non-conventional sales platforms, and likely to pile up in excess.

Expect a return of real estate speculators in 2025 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 paradise unless we have a long-encouraged coastal surge in residential construction of all types.

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How to prepare for the REO resurgence

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