Posted by ft Editorial Staff | Feb 16, 2020
36,200 new and resale home transactions closed escrow in California during December 2019. The number of homes sold was 20% higher than a year earlier. Of note, December 2018 experienced the lowest home sales volume since the Great Recession, therefore December 2019’s 20% year-over-year jump isn’t as impressive as it seems at first glance. December 2019’s year-over-year increase is a reversal of the long trend of falling year-over-year sales volume, which began in the second half of 2018. Despite December’s higher numbers, 2019 total home sales volume was 1% below 2018.
2019 ended with 437,500 home sales in California. This was 4,400 fewer home sales than took place in 2018, amounting to a 1% annual decrease. 2019’s slightly down performance follows a 4% decrease in 2018. For greater perspective, 2019’s 442,000 homes sales volume was 42% below peak sales volume experienced in 2005.
Home sales volume will continue its year-over-year decrease in 2020, slowing the flow of agent fees. Rapidly rising prices and interest rates in 2018, along with uncertainty brought on by shifting economic policies, have discouraged potential homebuyers and derailed sales. Therefore, home sales volume won’t rise significantly until after home prices bottom with the next recession, expected in 2020-2021.
Updated February 16, 2020. Original copy posted March 2009.
Chart update 02/15/20
|Dec 2019||Nov 2019||Dec 2018|
The above chart tracks the home sales volume of single family residences (SFRs) on a month-to-month basis. Sales volume includes the sale of all residential resales and new homes in California, including new homes sold directly by builders.
Home sales vary from month-to-month for a variety of reasons, most significant being homebuyer demand. This demand is influenced by several factors constantly at work in California’s homebuying market, including:
- seasonal differences [see Chart 2];
- changes in home prices;
- mortgage interest rates;
- consumer confidence;
- the presence of investors and real estate speculators in the market;
- negative equity status;
- the quantity and quality of jobs held by homebuyers; and
- homebuyer saving rates.
Seasonal differences in annual sales volume
It’s normal for home sales volume to rise in the first half of the year and fall after June, generally speaking.
Chart update 02/02/19
Chart 2 shows average home sales as experienced from 2011-2018. As depicted, the most homes are regularly sold each year in June. Another small increase takes place in December, as homebuyers seek to wrap up their financial activities before the end of the year.
Therefore, real estate professionals are not to worry when they hear of falling sales volume in the latter half of the year. This is a normal seasonal progression. What to watch for is year-over sales comparing a month or other period (such as year-to-date) this year with the same month or period last year.
A very long recovery for home sales volume
Annual real estate sales numbers since the Great Recession of 2008 suggest the upcoming years through 2017 will be characterized by the same continuing bumpy plateau in home sales volume we have experienced now for eight stagnating years. As a rule, current market action, whether up or down, is reflected first in sales volume, followed by prices, and both fluctuate from month to month mostly going in opposite directions or just standing still.
Chart update 02/16/20
To set the stage for a forward look, a review of sales volume in the recent past is helpful:
- Mid-2005 saw sales volume peak for all types of real estate in California, with nearly 754,000 homes sold that year;
- Nearly 30% fewer sales were recorded in 2006 than in 2005, while sales dropped an additional 30% in 2007;
- sales bottomed in 2008 and were artificially inflated in 2009 due to subsidy-induced purchases and speculators jumping on the momentum, but remained 40% below 2005;
- 2010 saw a decline from the year earlier in both sales volume and prices;
- 2011 increased slightly in sales volume while decreasing in sales prices, a normal price adjustment condition;
- 2012 saw sales volume increase marginally and home prices jump significantly by year’s end, supported primarily by massive speculation;
- 2013 home sales volume stagnated, while home prices continued to increase rapidly, not a good sign for the immediate future; and
- 2014 saw home sales volume decrease throughout the year, ending the year 7% below 2013.
- 2015 ended 9% higher than 2014 — in other words, just about level with 2013. [See Chart 4]
- 2016 and 2017 sales volume continued a flat trend in sales which began in 2015; and
- 2018 saw sales volume decrease rapidly in the fourth quarter, ending the year 4% below 2017.
Chart update 02/16/20
|Dec 2019||Dec 2018||Dec 2017|
|Home sales volume|
California home sales continue their year-over-year decline in 2020, ending the year 1% lower year-to-date (YTD). This continues a consistent decline in year-over-year sales volume that began in mid-2018.
Sales volume ended 2018 4.3% below 2017, amounting to 19,900 fewer sales. In contrast, 2017 home sales volume ended the year with just 3,800 more sales than in 2016. This is an increase of less than 1%. The previous year, 2016, also saw a minuscule increase over 2015.
Sales volume is not expected to languish until the years following 2021, due to:
- fewer participating first-time homebuyers than normal;
- lower homeowner turnover to buy an upgrade or relocate due to continued negative equity and delayed retirement;
- reduced home inventory across the state; and
- static turnover in rental occupancies.
Much of these disadvantages are due to the jobs recovery which has been dragged out for eight years now, a confidence issue, and is pronounced by wage increases below the rate of consumer inflation. California finally regained all jobs lost in the 2008 recession in mid-2014, but has yet to return to pre-recession employment levels after considering the 1.1 million working-aged population increase. At the current recovery pace this will occur in 2019.
Short sales, real estate owned (REO) property resales and speculators have contributed to sales volume distortion over the past few years. Conventional positive-equity resales by owner-occupants were the exception, sometimes reminiscently called standard sales as opposed to short sales. As prices rise, move-up homeowners will return to the market to sell and concurrently buy a more suitable replacement home.
Further, as of Q3 2017, 3.2% of California mortgaged homeowners were still underwater. Thus, turnover by this chunk of owners is restricted. These homeowners cannot sell and relocate to purchase another home because their homes are worth less than the debt encumbering them. To rid themselves of the home and the debt, they have to endure damaged credit resulting from a short sale or foreclosure. The desire to avoid this embarrassment takes most of these 3.2% homeowners out of the home buying market for years.
Home sales in the coming years
The forward trend in California home sales is mixed for both buyers and seller. Homebuyer income is going further and doing more than anytime during the past 15 years due to increased borrowing capacity brought on by low interest rates (even though they rose mid-2013 to cut back funding by 10% from one year prior, but dropped to fuel sales in 2015). In fact, the Buyer Purchasing Power Index (BPPI) went negative in June 2013 and bounced back to zero in September 2014 – this momentarily stalled home price expectations.
In December 2015, the Federal Reserve (the Fed) committed itself to raise short-term interest rates in order to keep a lid on the recovery (as they did in both 1984 and 1994 midway through those recoveries). This upward rate move by the Fed (and the bond market) will instantly be reflected in ARM rates, and eventually trickle into higher mortgage rates, likely around mid-2016. Higher FRM rates will promptly trend real estate sales volume down and some 9-12 months beyond prices will slip. As prices start to decrease, expect the short-term rate to decline in the 2017-2018 period which will slow and put an end any downward turn in real estate sales volume and the economy.
first tuesday forecasts home sales volume will return to 2006 levels around 2020-2021. The peak sales volume last seen in 2004, inflated by speculator acquisitions and excessive mortgage money, is unlikely to return for decades, when interest rates cyclically peak.
Relocating Baby Boomers going into retirement later this decade will be the primary propelling force in both selling homes and buying replacements beginning around 2019. Their Generation Y (Gen Y) children will add to the sales volume at the same time as they find jobs at better pay levels and become first-time homebuyers. Gen Y influence will peak in sales volume at the end of this decade as they complete their shift from renting to owning.
Once Californians feel the effects of two or three years of healthy employment growth, their confidence about the future will improve. They will once again be willing to invest in the economy since the expectations for tomorrow are projections based on yesterday’s most recent experience. Only then will occupying homebuyers – end users – return in sufficient numbers for sales volume to swell significantly.
In 2018, sales volume will begin to pick up in earnest, peaking in 2019-2021. Employment and labor force participation will have reached beyond its 2007 peak, and grow quickly. Then, California will once again see home prices jump beyond the rate of consumer inflation. Mortgage lenders with an eye for excess profits will then begin to loosen their lending standards to whatever extent federal regulators permit or lawyers divine. The memory of the grim mid-2000s will be politely pushed aside, and mistakes will be repeated by all participants – lenders, builders, brokers and buyers.
Favorable market conditions now at work
Several favorable market factors currently support increasing sales volume:
- A steady 3% annual increase in the number of new jobs;
- A more reasonable (though still rising) price trend as we start 2016;
- Slowly rising consumer confidence and spending; and
- the recapitalization of the private mortgage insurers to eventually replace (or fully compete with) government guarantees of home mortgages.
Trends to be concerned about
However, many unfavorable market conditions restrain the rise of home sales volume:
- the weakest homebuyer demographics in 15 years;
- failed savings for a down paymentas high rents squeeze potential first-time homebuyers out of saving;
- buyer borrowing power no longer enlarging the funds they can borrow as interest rates inevitably rise, reducing funding for purchase-assist financing and dampening property prices;
- the public’s increasingly anti-business and pessimistic attitude about American economics, wealth inequality and national politics no matter the outcomes; and
- tightened loan standards as lenders are forced to apply forgotten fundamentals of sound mortgage lending practices (20% down payment on non-FHA/private mortgage insured loans, lower income ratios, risk-free credit scores and full documentation of income, funds and collateral value).