Sales volume: a powerful magnet for home prices

California home sales volume continued to slow in the second quarter (Q2) of 2020, with quarterly sales volume 29% below a year earlier. However, the annual price rise has recently picked up, inflated by record-low mortgage interest rates. Home prices were 3.5% above a year earlier in Q2 2020.

Home price trends typically follow consistent sales volume movement about 12 months hence. The delay is due to the sticky pricing phenomenon that discourages sellers from accepting lower sale prices. But California’s housing market is upside down in 2020, as home prices continue to rise despite the rapid drop in sales volume. As long as mortgage interest rates continue to decrease, prices will receive a boost. But interest rates can only go so low without the Federal Reserve (the Fed) “going negative,” a real possibility during this 2020 recession.

Behind both sales volume and price movement is that all-important factor: jobs. Homebuyers need a reliable source of income to purchase, necessary for homes to sell and prices to remain buoyed. But the 2020 recession has thus far experienced record job losses, with employment 14% below the December 2019 peak as of May 2020. Expect to see job numbers rise and fall as we make our way through the w-shaped recession. But, jobs won’t begin a real recovery until the rebound from the 2020 recession, likely to begin around 2022-2023. Until then, expect to see home sales volume remain low, and prices to follow, depending on how the Fed continues to react to the economic fallout of 2020’s recession, pandemic and financial crash.

Updated August 17, 2020. Original copy posted March 2014.

Editor’s note – Note the chart above shows a 6-month moving average for sales volume. Therefore, while actual home sales volume average 29.5% below a year earlier in Q2 2020, the longer 6-month average displayed on the chart is just 11% below a year earlier.

Chart update 08/17/20

Sales volume projects home prices

Many indicators go into forecasting home prices, including:

• home sales volume;
• buyer purchasing power;
• jobs performance; and
• mortgage rates.

Of these, home sales volume movement has the most direct impact on tomorrow’s home prices.

The chart above tracks movement in home prices and the corresponding impact on home sales volume movement roughly nine months hence. Movement in home sales is depicted in the chart above by plotting the percent change from one year to the next. We use a six-month moving average to smooth out month-to-month fluctuations caused by seasonal pressures.

One important factor not displayed on the chart is rising fixed mortgage rates, which began in late-2016 and continued well into 2018. This interest rate action has pulled the home sales volume to trend downward. But, despite drastically slowing sales, prices have continued their upward trend, but are quickly decelerating. This is mostly due to excess demand, unmet by a shrinking for-sale inventory.

Forecasting a recovery starts with volume

The drawn-out recovery following the 2008 recession had many false starts. First, 2009 saw home sales volume rise for the first time since peaking in 2004. However, the rise was artificially stimulated by the federal government’s first-time homebuyer tax subsidies. Real demand was not yet present, thus sales volume fell back in the following year.

All the same, 2010 saw the first slight increase in home prices since the peak in 2005. Home sales volume fell in 2010, preceding the corresponding drop in home prices in 2011.

Another rise and fall came in 2012, as speculators began their occupation of California’s housing market. By 2013, the housing market was dominated by speculators. This caused home prices to rise without the support of home sales volume. Thus, as speculators continued their swift exit from the market in 2014, price increases leveled off and continued until 2018 at a steady 7%-9% annual increase. Going into 2019, home prices finally declined after 12 months of flat-to-down sales volume.

However, the first half of 2020 has seen a reversal in home prices, buoyed by historically low mortgage interest rates. Meanwhile, home sales volume has plummeted, with sales volume year-to-date (YTD) 14% below a year earlier as of Q2 2020.

The foundation for a true recovery isn’t sales volume

Home sales volume movement is a good way to predict home price movement. But it’s a mechanical correlation – the relationship between sales volume and prices doesn’t tell you how stable the respective changes are. To predict volume and price stability, you also need to look to jobs.

Since homeowners and renters require an income to make housing payments, California’s jobs market is a reflection of its housing market. Therefore, look to the jobs recovery for a recovery in home sales volume, followed by prices.

Jobs finally returned to their pre-recession level in California in 2014. However, when accounting for population increases, jobs didn’t reach a full recovery until 2019, just in time for the next recession to arrive in February 2020. Since then, record job losses have occurred across California, with employment 14% below the December 2019 peak as of May 2020.

Expect to see job numbers rise and fall as we make our way through the w-shaped recession. But, jobs won’t begin a real recovery until the rebound from the 2020 recession, likely to begin around 2022-2023.