25,832 homes closed escrow in California during January 2014. This is down 26% from the prior month and down 11% from one year earlier when 28,871 sales took place.

January’s 11% year-over-year decrease continues the downward trend experienced in home sales volume throughout most of 2013. At this time last year, home sales volume was still high, riding the wave of low interest rates. However, increases in both home prices and mortgage interest rates stifled upward movement in sales volume in 2013.

2013 ended with 446,419 home sales, roughly level with the 449,059 home sales in 2012. Home sales volume remained down by around 40% from the peak year of 2005 when 753,876 sales closed escrow.

first tuesday forecasts a slightly weaker home sales volume for 2014 than experienced in 2013. This reflects the 2010-2011 experience in home sales volume as it occurred after the 2009 tax stimulus. 2012-2013 received a similar “stimulus” from speculators who propped up sales volume and prices. Now, as they continue to exit the market in 2014, expect sales volume to reduce and prices to slip, as sufficient end user demand is still lacking due to slow job creation and high mortgage rates.

The bumpy recovery continues — but the ride is getting rougher, and the duration frustrating. California’s housing market needs about 60,000 homes sold monthly to fully recover. That recovery is dependent on 18-24 months of annual California job growth exceeding 350,000-400,000 jobs. We are nowhere close at this point in the recovery, but likely will be around 2016.

Other key factors controlling California’s housing market sales volume follow.

Absentee homebuyers: to hold or to fold?

Absentee homebuyers (speculatorsbuy-to-let investors and renovation contractors) remain high. Absentee homebuyers accounted for 28% of Southern California (SoCal) January sales volume, up slightly from the prior month and down from 32% one year earlier.

However, the actual number of speculators continued to slip in January 2014, a sure sign speculators are continuing their exit.

Absentee homebuyers made up 24% of Bay Area homebuyers in January, up from 23% in December and down from 28% one year earlier.

Speculators chase upward price movement, but sales volume has been softening for 11 months. Once released, December 2013 data is expected to show a slip in home prices. Thus, expect absentee buyers to comprise a smaller percentage of monthly sales into 2014.

Cash purchases (two-thirds of which are made by speculators) remained abnormally high in January, representing 29% of SoCal sales volume. However, cash sales decreased steadily in 2013, and are currently just above their lowest volume since September 2010. In a normal market, cash purchases represent around 16% of all buyers, comprised mainly of end users.

The percentage of sales attributed to cash purchasers will trend downward well into 2014, as speculators abstain in reaction to slipping prices.

Bay Area cash sales were 25% of home sales in January 2014. This is down from 28% one year earlier.

Speculators remain motivated to buy only so long as they believe home prices will rise quickly. Expectations of a quick resale have faced the headwinds of falling sales volume since November 2012. The numbers indicate reality has begun to set in. Expect a speculator mass exodus when prices follow sales volume and take a sympathetic nosedive. Prices have likely already begun to slip.

The annual increases in the buyer purchasing power index (BPPI) came to an end in mid-2013, dimming the prospects of flipping for a profit. Higher mortgage rates indicate homebuyers are unable to qualify for as much principal as a year ago. Sellers ignore these trends at their peril.

When speculators realize they cannot make a short-term profit as soon as anticipated, most will quickly leave the market or resort to Plan B to hold for another five years. The inventory they dump (today’s growing shadow inventory) will need to be consumed primarily by end users and income property investors. However, there aren’t enough of these buyers ready and willing to sustain even the current low sales volume. Thus, expect prices to remain level to down through 2015.

At the moment, end user demand is half of what is needed for a normal 60,000 monthly sales volume.

Jumbo loans: room at the top

Jumbo loans (loans over $417,000) accounted for 27% of SoCal’s January 2014 sales. This is down from 29% in the prior month and up from 19% a year earlier. Jumbo loans were at their peak in mid-2007, when jumbo loans consisted of 37% of SoCal sales.

Jumbos financed a whopping 47% of Bay Area sales. This is down slightly from the prior month and up from 36% a year earlier.

Jumbo use has risen statewide as sales of high-tier properties accelerated in 2013 — particularly in the pricey Bay Area with its greater concentration of new wealth. Despite this increase, jumbo use remains far below its peak in 2006-2007 when buyer overreaching maxed out.

FHA-insured loans: a window is closing

Federal Housing Administration (FHA)-insured loans made up 21% of January SoCal mortgage recordings. This is up slightly from the prior month, and down from 25% one year earlier.

FHA-insured loans made up 12% of Bay Area mortgages in January. This is up slightly from the prior month and down from 15% one year earlier.

California’s appetite for FHA-insured loans is waning: FHA-insured loan use is around its lowest level since late 2008. first tuesday anticipates the share of FHA-insured loans will steadily drop, hitting a bottom of 4% of loan originations around 2018. High (and rising) FHA insurance premiums make conventional loans with private mortgage insurance (PMI) more appealing, as they ought to be.

The FHA has gradually tightened buyer standards to protect their mortgage insurance fund, with a limited exception for buyers who have very recent foreclosures or bankruptcies. Nonetheless, FHA-insured financing remains popular as a loan of last resort for determined first-time homebuyers with low savings and less than ideal credit scores or debt ratios.

ARMs: holding lenders at bay

Adjustable rate mortgages (ARMs) made up 14% of all SoCal mortgages in January 2014, more than twice the 6% share one year earlier. SoCal ARM use in January remained the highest since mid-2008, the heart of the recession. ARM use made up 16% of all SoCal sales in April 2008.

ARM use in the Bay Area was at 24% in January. This is up from 22% in December and up from 11% a year earlier. Cash transactions in the Bay Area are slipping, a warning that prices are being supported by ARMs. If this trend continues into 2014, the Bay Area will certainly be in a bubble and due for a crash-like adjustment in sales volume and prices.

ARM use will remain relatively low statewide until property prices rise more than 5% annually for at least two years. This probably will not happen with the current price trends. When it does, ARM use will increase as agents push homebuyers to overreach on amenity value, appraisers drift away from comparable pricing and, inevitably, lenders relax credit standards. This is unlikely until the next big bubble, expected to occur around 2018-2020.

Re: California January home sales from DataQuick