Home sales volume rides the bumpy plateau
The above charts track the home sales volume of single family residences (SFRs) on a month-to-month and annual basis. Sales volume includes the sale of all residential resales and new homes in California, including new homes sold directly by builders.
Annual real estate sales numbers since the 2008 recession suggest the upcoming years through 2016 will be characterized by the continuing bumpy plateau in home sales volume. Today’s market action, whether up or down, is reflected first in sales volume, followed by prices, and both fluctuate from month to month. [See Chart 1]
In 2014, home sales volume was 7% below the prior year. Sales volume will not significantly increase until after 2016, 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; and
- static turnover in rental occupancies.
Much of these disadvantages are due to the slow jobs recovery. California finally regained all jobs lost in the 2008 recession in mid-2014, and 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.
Buyer-occupants made up less and less of the sales market compared to speculator activity during 2013, lingering in 2014. This high level of speculation drove price increases beyond the borrowing capacity of occupying homebuyers.
Further, as of Q1 2015, 8% of California mortgaged homeowners were 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 out of the home buying market for years.
first tuesday forecasts home sales volume will return to 2006 levels around 2020. The peak sales volume last seen in 2004, inflated by speculator acquisitions and excessive mortgage money, is unlikely to return for decades, and not until after 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 and become first-time homebuyers. Gen Y influence will peak at the end of this decade.
Causes for the rise and fall
The forward trend in California home sales remains grim for sellers. Not so for buyers, as speculators will soon decide to exit the market. Homebuyer income is going further 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). 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.
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;
- Early 2006 produced both the peak in sales prices and the initial precipitous decline in sales volume. Nearly 30% fewer sales were recorded in 2006 than in 2005;
- In 2007 sales volume dropped another 30%;
- 2009 sales were artificially higher than anticipated due to subsidy-induced purchases and speculators, but remained 40% below the 2005 peak year;
- 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;
- 2012 saw sales volume increase marginally and home prices jump significantly, supported primarily by massive speculation;
- 2013 home sales volume stagnated, while home prices continued to increase rapidly; and
- 2014 saw home sales volume decrease throughout the year, ending the year 7% below 2013.
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 have been the exception, sometimes reminiscently called standard sales. As prices rise, move-up homeowners will return to the market to sell and concurrently buy a more suitable replacement home.
Continuing into mid-2015, sales volume will remain listless as speculators leave the market to buyer-occupants and buy-to-let investors. At some point before a further increase in mortgage rates, speculators will return to the market as sellers, seeking to flip their accumulated shadow inventory acquired and rented out during the 2012-2013 period.
The bounce loses energy and hunts for the floor
Home sales volume in 2014 was 7% lower than 2013. However, 2015 has seen a turnaround, with year-to-date home sales volume 10% higher than a year earlier as of July 2015. Prices also continue to rise, albeit at a slower pace than 2012-2014. Today’s rising prices will face the headwinds of increasing FRM and ARM rates in 2016. Thus, prices are expected to decline in the second half of 2017, nine to twelve months following the mortgage rate-induced stumble in home sales volume.
Properties amassed by speculators during 2012-2013 now form a massive shadow inventory, most to be resold when prices begin to rise again. These properties will likely hit the market within the next couple of years. But when, and at what price? The answers will shape sales volume and pricing over the next few years.
Later in 2015, the Federal Reserve (the Fed) will need 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 eventually trickle into higher mortgage rates, likely around mid-2016. Higher FRM rates will trend real estate sales volume down and prices will slip. As prices start to decrease, expect the short-term rate to decline in the 2016-2017 period which will offset any downward turn in real estate sales volume and the economy.
For home sales volume to complete its recovery to 50,000-plus monthly sales volume, employment will need to increase at the rates experienced in the mid-1990s: 350,000+ additional jobs created at an annual rate for 18 months. We just reached this pace in 2014.
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.
In 2016, sales volume will begin to pick up, peaking in 2019-2021. Employment will have reached beyond its 2007 peak, and will continue to 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.
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 go through 2015;
- 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 payment as 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 by purchase-assist financing and dampening property prices;
- the public’s increasingly anti-business and pessimistic attitude about American economics, wealth inequality and national politics; 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).
The competitive broker
What’s a broker to do until home sales volume takes off?
SFR brokers and agents might consider adding SFR-related services to supplement their income. Those who do add related services will restructure their practice as “all-service brokers.” Transaction-related services will be integrated into their office operations to maintain solvency and grow.
These services include:
- escrowing their in-house transactions under the broker’s license;
- entering into or expanding property management services;
- negotiating equity purchases for investors from sellers-in-foreclosure who have a positive equity or the chance of a short sale discount;
- specializing in sales and leasing of a particular type of commercial property, other branch office locations and alternative marketing approaches (aside from social media);
- providing mortgage loan broker services for business-investor loans made by private lenders (no mortgage loan origination (MLO) endorsement required);
- arranging carryback financing and the take over/assumption of existing mortgages, and buying and selling those carryback trust deed notes;
- negotiating options to buy;
- exchanging properties with equities to help owners relocate their wealth held in real estate tax free; or
- using barter credits in lieu of greenbacks, etc.
Brokers need to insist their prospective buyers commit to exclusive representations by the broker and agent to locate a home (or other property). By signing an exclusive right-to-buy listing agreement, buyers commit to employ brokers and agents just as sellers commit to employ brokers and agents, the obverse side of the same employment coin. This will ensure time spent with a buyer produces a closing and a fee. (Carrie B. Reyes, First Tuesday)