Still sinking, California home sales volume comes up for air in August 2022

After four consecutive months of decreasing sales, California home sales volume rebounded slightly in August 2022.

Sales volume usually rises from an annual low point in January to a peak mid-year. In 2022, home sales volume peaked early, in March, with home prices peaking just three months later, in June.

34,100 new and resale home transactions closed escrow in California during August 2022. The number of homes sold in August was 7% above the prior month but a devastating 29% below a year earlier, amounting to 14,000 fewer sales.

Year-to-date (YTD) home sales volume is a strong predictor of annual sales volume. As of August 2022, YTD sales volume is 18% below a year earlier. Compared to 2019 — the last “normal” year for housing before the Pandemic Economy took over — home sales volume YTD is a minor 2% higher as of August 2022.

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.

However, due to the uncharacteristically steep annual sales volume rise that occurred early in 2021 — fed by buyer fear of missing out (FOMO) on low inventory and homebuyers taking advantage of historically low interest rates and stimulus boosts — the typical year-over-year comparisons are not useful today. Instead, consider comparing today’s sales volume to the last pre-pandemic year: 2019.

Here, we see the path of home sales volume in 2019 (the black line) alongside sales volume thus far in 2022 (the red line). The dashed lines display the abnormal years of 2020-2021, which were distorted by Pandemic Economics.

While sales volume started off 2022 at a faster pace than 2019, after peaking in March, it has quickly tapered off to below 2019 levels. Thus, after two years of irregular home sales volume, expect sales volume in 2022 to end the year slightly below 2019, tempered by rising interest rates and restrained homebuyers.

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

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 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).

Editor’s note — Despite recent 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 home 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, 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 inventory in check);
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 at the pandemic’s outset.

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

However, while the government created a bridge to carry consumers across the pandemic-era recession, the bridge also delayed the inevitable. While the government’s stimulus measures were coming to an end, the economy was on the return path towards recession, which is here to do damage to California’s housing market in 2022.

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California home sales in 2023 and beyond

Home sales will continue to fall back in 2023, due to:

significantly higher mortgage interest rates, which have damaged buyer purchasing power, down 31% from a year earlier as of September 2022;
2021’s expiration of the foreclosure moratorium, which has caused a backlog of forced sales to hit the market, creating a further drag on home prices and discouraging homebuyers;
lower homeowner turnover as buyer FOMO turns to restraint in the face of rising rates and rising inventory; and
the ongoing recovery of job losses of 2020, over 165,000 of which are still absent from the jobs market as of June 2022.

As the Fed continues its steps to cool inflation, the second act to the 2020 recession has unofficially arrived following two consecutive quarters of negative gross domestic product (GDP) in 2022. As evidenced by yet another month of historic sales volume losses, this undeclared recession is already wreaking havoc on the housing market.

Watch for declining sales volume to continue in 2022-2024, with prices bottoming around 2025. As prices continue to plummet, recent homebuyers are already finding themselves underwater, weighed down by negative equity. Unable to complete a traditional sale, more of these homes will head toward foreclosure and become real estate owned (REO) properties.

Then, expect a return of real estate speculators to provide a boost during the coming slump, with a sustainable recovery taking off with the return of end user homebuyers around 2026-2027.

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