California home sales volume continued its downward trend in July 2023. This follows a weak seasonal bump which struggled to build momentum during the (usually) busy spring home-buying season.

Just 23,000 new and resale home transactions closed escrow in California during July 2023, down 12% from the prior month and down 13% 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 28% below 2022 as of July 2023.

Analytically, the classic year-over-year comparisons lack usefulness today due to the ripple effects of the uncharacteristically steep annual sales volume rise that occurred early in 2021 — a distortion fed by:

  • homebuyers perceiving an advantage in historically low interest rates,
  • homebuyer fear of missing out (FOMO)due to insufficient inventory for selection, 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 July 2023, sales volume year-to-date (YTD) is a weightier 27% below 2019 — and falling, as it will until the speculators arrive, likely in 2025.

Related article:

Price cuts moderate during spring bump, with more to come

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 gleefully gave it up; landlords and sellers happily took it in.

As a result, consumer inflation — rent — and asset inflation — property prices — skyrocketed while personal savings plummeted to a decade’s low.  Households are left unprepared for the coming financial turmoil.

We are now reaping the consequences. 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 to work its worst magic on California’s property markets, and likely to linger well into early 2026. Fallout from negative equity for recent buyers of mortgaged property will continue for years into the following recovery.

Related chart:

Negative equity and foreclosure


Real estate sales in 2023 and beyond

Property sales will continue to fall back for the remainder of 2023 and well into 2025 due to:

  • today’s elevated FRM interest rates, which have slashed buyer purchasing power (BPP) by reducing the capital buyers can borrow to fund the maximum purchase price they are able to pay for a home, down 13% from a year earlier and down 24% from 2019 as of May 2023;
  • augmented capitalization rates, which have reduced the price investors will pay for income property due to the huge uptick in 10-year Treasury Note rates coupled with a developing awareness for a higher risk premium applicable to evaluating rental income from Class A, B, and C income properties;
  • lower homeowner and tenant turnover as buyers face the dual dilemma of rising mortgage rates which limit the amounts borrowed as purchase-assist capital and sellers’ sticky asking prices unadjusted to meet buyer capacity, while inventory increases to melt away any FOMO; and
  • the broader economic recession, which will at some point bring job losses  and mortgage foreclosures.

Even as California reached a full jobs recovery from the 2020 pandemic recession at the end of 2022, another more deep-rooted 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, increasing in 2024 when foreclosures will start to pile up.

The result: home and investment property sales volume and prices won’t begin a recovery from the 2023-2024 California downturn until the years following 2025. By 2027, our economy will be staging its next sustainable expansion.

Related article:

Today’s homeowners are stuck on yesterday’s rates

In the meantime, home sales volume will continue its decline in 2023. 2024’s sales volume drop will depend on how steeply prices drop in 2023; if it’s fast down for prices, then expect an early bottom for sale volume by mid 2025, but not a fast recovery.

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 mortgage holders resorting to short sales dependent on the negative equity homeowner locating a buyer, not the REO servicer. Thus, they will be sold by real estate brokers 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 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, now state enforced coastal community surge in residential construction of all types.

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