California home sales volume increased in March 2022 from the prior month but was down from a year earlier. This month-over-month increase was a typical seasonal adjustment, as sales volume typically rises from an annual low point experienced each January to a mid-year peak.

44,500 new and resale home transactions closed escrow in California during March 2022. The number of homes sold in March was 12,700 more than the prior month but 2,700 fewer than a year earlier, amounting to a 6% year-over-year decrease. For reference, the rapid pace of sales experienced in California since 2020 began to taper off in the second half of 2021, continuing in 2022.

The steep annual sales volume rise that occurred earlier in 2021 was thanks to homebuyers taking advantage of low interest rates and stimulus boosts. Homebuyers were influenced by a fear of missing out (FOMO) on a low inventory of homes for sale. Historically low inventory continues in 2022. But as the effects of stimulus are now behind us and interest rates are increasing rapidly with the Federal Reserve’s (the Fed’s) bond taper, homebuyers have begun to ease off the gas and sales volume is slowing.

Along with a deep cut to home price potential, 2022’s rapidly rising interest rates are causing sales to stall. In response to a recent firsttuesday poll, 34% of readers report escrow cancelations due to the recent interest rate hike.

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

At an annual rate, 2021 ended with 536,600 annual home sales in California. This was a significant 97,400 more home sales than took place in 2020, amounting to a significant 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). And yet, despite recent gains, 2021’s strong year for home sales volume was still 29% below the peak year for sales volume in 2005.

Why was 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 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, kept there 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);
  • 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.

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

But as these measures end, the question for real estate is: will the effects continue in 2022 and beyond? Or will the inflated markets pop, as in an artificial bubble?

California home sales in 2022 and beyond

Despite 2021’s sales volume jump, home sales are expected to fall back in 2022, due to:

  • rapidly rising mortgage interest rates, which have caused buyer purchasing power to decrease over 20% from a year earlier as of April 2022;
  • 2021’s expiration of the foreclosure moratorium, which will cause a backlog of forced sales to hit the market, dragging down home prices and discouraging homebuyers;
  • lower homeowner turnover as buyer FOMO subsides in the face of rising rates and rising inventory; and
  • the ongoing recovery of job losses of 2020, 400,000 of which are still absent from the jobs market as of March 2022.

The housing market won’t begin a consistent recovery until well after the need for government intervention and the pandemic response have ended, a timeline which continues to shift. Even then, California will need to recover the historic job losses of 2020. Further, a second, double-dip recession is expected in 2023. A stable recovery is not likely to even begin until around 2024, at which point a surge of speculators will arrive on the scene to swoop up low-priced inventory.

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The difference between seasonal and long-lasting trends

Home sales vary from month-to-month for a variety of reasons, most significant being homebuyer demand. This demand is influenced by several factors currently at work in California’s homebuying market, including:

  • seasonal differences, as sales volume tends to peak mid-year, falling into the slow winter months;
  • mortgage interest rates, which were at historic lows in 2020-2021 but have jumped significantly in 2022;
  • homebuyer confidence, which has swung wildly since the outset of the 2020 recession and continuing its volatile path through today’s recession hangover;
  • available multiple listing service (MLS) inventory, which remains well below homebuyer demand at the start of 2022; and
  • in 2020-2021, homebuyer fear-of-missing-out (FOMO), which pushed both sales volume and prices over sustainable heights.

Year-to-date (YTD) home sales volume can be a strong predictor of annual sales volume. While we only have data for the first quarter of 2022 available, YTD sales volume is 6% below a year earlier as of March 2022.

firsttuesday forecasts sales volume to fall below 2021 throughout 2022, tempered by rising interest rates, a still-recovering jobs market — and more sober homebuyers.

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