Home Sales COLLAPSE in California (and Vacation Cities)

The National Association of Realtors just released their February 2023 Home Sale Report. And boy - does the data send some conflicting messages about the Housing Market. I will break down the results of the the NAR Report later in this post.

Because I want to start by talking about California. And how California's Housing Market and Economy are both in free-fall right now. The weight of rising interest rates, tech layoffs, and a banking crisis is taking its toll on the Golden State. Something that can be seen in California's pitiful levels of homebuyer demand, which are down 30-40% YoY across the state.

Whether we're talking Los Angeles, Bakersfield, San Jose, Stockton, Sacramento, or Redding - the same story is playing out. Massive 30-40% declines in home sales year-over-year according to data from Redfin. Such large declines in sales indicate that homebuyer demand in California has left the building and is unlikely to return for a long time.

Entire Western Half of America Continues to Struggle

But zooming out reveals that a lack of buyers isn't just a California problem. It's one that is dominating the entire Western Half of America. States such as Arizona, Nevada, Oregon, and Washington are all experiencing a similar decline in homebuyers.

Which makes talk of a "recovery" in these markets amusing to me. I've seen quite a few comments on YouTube recently about how metros like Phoenix, Vegas, and Seattle are supposedly "bouncing back".

But it's hard to believe that when looking at the map below. Perhaps sales are up a bit from where they were 3-4 months ago in these markets. But they are still in the tank overall. With a clear geographic trend emerging that shows the West Coast as a sinking ship.

Which brings us to the Northeast. An area which up until this point had held strong in terms of buyer demand. However, that is changing fast. Metros such as New York, Poughkeepsie, Bridgeport, Providence, and Philadelphia are now showing sizable declines in homebuyer demand. An indication that we may finally see inventory start to increase in these markets in the spring.

The Biggest Loser: Vacation Cities

But the biggest loser in terms of homebuyer demand over the last year isn't a specific geographic location. Rather, it's a certain "type" of area.

Vacation areas.

Whether they're located in Florida, Tennessee, Arizona, or New Jersey, data from Redfin shows that cities dominated by vacation-goers have experienced the biggest collapse in homebuyer demand from 2022 to 2023.

(Just take a look at the table below to see. Cities with a red arrow next to their name are vacation towns.)

Sevierville, TN was the biggest faller, with an astronomical 60% decline in sales. Key West in Florida had a 47% decline. Daphne, AL was -44%. What's evident is that the smallest vacation markets got hit the hardest.

But let's also pay attention to bigger cities like Miami, down 36% on buyer demand. That's the worst performance for any large city in America and suggests Southeast Florida's real estate supremacy is about the come to an end.

And ultimately it's not really surprising to see such a sharp decline in sales in vacation-oriented destinations. After all, a large share of the buyers in these metros are making a discretionary 2nd home purchase. When the economic climate turns negative, and mortgage rates go up, the demand to make these type of discretionary purchases goes down.

I suspect prices in some of these markets could go down a lot in the coming years. Studies show a similar trend occurred after the last Bubble Burst in 2006 as vacation areas with a high share of 2nd homeowners got hit the hardest.

NAR Home Sales Report: down YoY, up MoM

As I mentioned in the intro to this article: the National Association of Realtors just released their home sale statistics for February. And these figures showed that existing home sales in February 2023 declined by 23% year-over-year (not good).

But actually increased by 15% month-over-month to 4.58 Million (good?).

This monthly increase in existing sales is something I anticipated several weeks ago when I noted an increase in cash buyers entering the market. And it's something that is now causing realtors, as well as the mainstream financial media, to tout a narrative that the housing market is "recovering".

Which begs an interesting question. Is the monthly increase in buyer demand an indication of true recovery in the Housing Market? Or is it a dead-cat bounce that will crash back down in future months?

To answer that question, we need to start with context.

The first context to note is that February 2023's 4.58 Million sales figure is still very bad. So bad, in fact, that February 2023 was the worst February for existing home sales in over 10 years. You have to go all the way back to 2012 to find a comparable month with buyer demand so low.

What's more: this February's sales figures were 25-35% lower than the levels experienced in 2020-22 when the pandemic was in full swing.  

So to the extent that February 2023 is the sign of a housing recovery, it's a recovery that has a long way to go.

Mortgage Applications suggest Home Sales will Drop Again

But I'm skeptical that the recovery will be sustained.

Because the fundamentals of the Housing Market still look bad. With homebuyer sentiment is at its lowest point ever. According to Fannie Mae, 79% of Americans now say it's a bad time to buy a house.

Bad homebuyer sentiment is showing up in real-time buyer indicators such as the Mortgage Purchase Application Index produced by the Mortgage Bankers Association. This index tends to "lead" the Housing Market by 1-2 months and predict where future home sales are going. As you can see in the graph below, Mortgage Apps and Sales have a very tight historical relationship.

But the relationship has deviated in recent months. Home Sales increased in February, but Mortgage Applications continued their march lower. Plummeting down to an average index level of 153 so far in March.

How could Home Sales go up while Mortgage Applications are going down? Cash buyers, that's how. They have no need to apply for a mortgage. There has also been an increase in seller financing, whereby the seller of the house provides the mortgage rather than a bank.

Ultimately I'm skeptical that both cash buyers and alternative financing buyers will be able to sustain a housing recovery. Because they are still small potatoes to the regular American homebuyer who uses a mortgage (the NAR just reported 72% of sales in February used a mortgage to complete the transaction).

That leads me to believe that home sales will decline once again in March and April, barring a miraculous recovery in mortgage applications in future weeks.

Things to watch out for in the Spring 2023 Housing Market

It's officially spring. Which means activity in the Housing Market will increase seasonally over the next several months.

We're likely to see a lot more new listings hit the market over the coming months. There will also be more buyers entering the market seasonally. However, the important thing to monitor will bee the year-over-year changes in both. I suspect we will begin to see inventory increase substantially in April as spring sellers combine with a depressed mortgage application market.

Of course - these are just my predictions. You will need to track the data by month to see if they come true. And you'll want to use the Reventure App to do that. Specifically, make sure to monitor two key indicators in your Housing Market:

1) Price Cut Share (%) - see example below for Nashville

2) For Sale Inventory - see example below for Salt Lake City

The more that you see the % of Sellers cutting the price increase, the better for you as a buyer. It's a sign they are getting desperate. Additionally, the more that inventory goes up, the better, as you have more choice.

You can use Reventure App to track Price Cut Share (%) and For Sale Inventory in every State, County, Metro and ZIP Code across America. You can access the graphs feature by hitting 'Graphs' on the top bar once you're in the App.

One last thing...

I'm curious to hear some feedback on how your experience with Reventure App is going. Are there particular parts of the tool you enjoy using? Are there frustrating parts? What else would you like to see?

Let me know in the comments below. We're planning on making some big improvements in future weeks.

-Nick