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California Home Sales Volume continued its downward plunge into July 2022, marking the fourth straight month of declining sales, atypical for the annual sales cycle.
Sales volume typically rises from an annual low in January to a mid-year peak. That’s why another month of lower sales volume is ringing alarm bells for sellers – and future prices – an alarm has sounded again and again in previous years first tuesday
32,000 new and resale residential transactions concluded escrow in California in July 2022. The number of homes sold in July was 20% lower than the previous month and 18% lower than a year earlier, representing 16,400 fewer sales. Historically, this was the lowest July sales volume since 1995.
Year to date (YTD) The sales volume of homes is a strong predictor of the annual sales volume. As of July 2022, YTD sales volume is 16% lower than a year earlier.
The rapid pace of sales in California since 2020 began to slow down in the second half of 2021 and continued into 2022. And yet, due to the unusually strong annual sales volume increase that occurred in early 2021 – fueled by buyers’ fear of missing out (FOMO ) about low inventory and home buyers taking advantage of historically low interest rates and stimulus — the typical year-on-year comparisons aren’t all that helpful these days.
Instead, consider comparing today’s sales volume to the last “normal” year we experienced: 2019.
Here we see the development of the housing sales volume in 2019 (the black line) next to the sales volume so far in 2022 (the red line). The dotted lines represent the anomalous years 2020-2021, which were distorted by Pandemic economy.
Although sales volume started faster in 2022 than in 2019, after peaking in March, it quickly declined below 2019 levels. So, after two years of irregular home sales, expect sales volume in 2022 to end the year slightly lower. than in 2019, tempered by rising interest rates, a still-recovering job market — and more sober home buyers.
Government efforts to bridge the gap are over
On an annual basis, 2021 ended with 536,600 annual home sales in California. This was significantly 97,400 more home sales than in 2020, representing an annual increase of 22%.
However, this increased performance follows several years of flat sales volumes (the bumpy plateau recovery after the foreclosure crisis of 2009 and the financial crash).
Editor’s note – Despite recent gains, the strong 2021 year for residential sales volume was still 29% below the peak year for sales volume in 2005.
Why were house sales volume and house price increases so strong in 2021 compared to past years?
The federal government took a number of measures to bridge for consumers, to get them from the time of the 2020 recession to the end of the pandemic response. The result was a well-run housing marketwith low interest rates and extra cash providing a launching pad for renters, homebuyers and investors to take the plunge into real estate.
The government’s measures include:
- to keep interest rates artificially low in 2020-2021, kept low by the Fed’s purchase of mortgage-backed bonds (MBBs) and the zero rate on its benchmark rate;
- a eviction and foreclosure moratoriumallowing renters and homeowners who couldn’t make housing payments to stay in their homes (and kept those homes off the market, keeping inventory in check);
- individual stimulus checksthat boosted consumer spending, not just for those who lost their jobs during the 2020 recession, but for consumers across the income spectrum;
- a continuous pause on student loan payments, which also enabled more consumer spending, supporting the economy; and
- setting up and expanding the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan grant program to help small businesses survive the onset of the pandemic.
All of these federal measures helped drive enthusiasm (and prices) not just for real estate, but for all types of assets.
While the government created a bridge to guide consumers through the recession of the pandemic, the bridge also delayed the inevitable. As government stimulus came to an end, the economy was on the road to recovery recession.
Press Release: Buyer Purchasing Power Index (BPPI) Drops to New Low in Q2 2022
California Home Sales in 2022 and Beyond
Home sales will decline further in 2022 as a result of:
- significantly higher mortgage interest ratesthat have hurt buyers’ purchasing power, down 26% from a year earlier from July 2022;
- the expiration of the 2021 execution moratoriumleading to a backlog of foreclosures in the market, putting further pressure on house prices and discouraging home buyers;
- lower homeowner turnover if buyer FOMO becomes hesitant in the face of rising rates and rising inventory; and
- the ongoing recovery of laid off of 2020, of which more than 165,000 are still absent from the labor market as of June 2022.
As the Fed continues its steps to cool inflation, the second step in the 2020 recession has technically (yet unofficially) arrived after two consecutive quarters of negative gross domestic product (GDP) in 2022. As evidenced by another month of historic revenue losses, this undeclared recession is already wreaking havoc on the housing market.
Note that the declining sales volume will continue in 2022-2024. In turn, prices will fall back to the trendline of the average price by 2025. If prices fall, recent homebuyers will soon find themselves under water, weighed down by negative equity. Since a traditional sale cannot be completed, some of these homes will move toward foreclosure and become real estate owned (REO) properties.
Then expect a return of real estate speculators to boost the coming slump, with a sustained recovery kicking in around 2026-2027 alongside the return of end-user home buyers.
How to prepare for the REO resurgence?
Until read more on trends in the sale of homes and first tuesday analysis, check out the volume charts of California home sales.