Affordability and mortgage rates are the biggest challenges for a still-struggling housing market
Slightly better mortgage rates and solid gains in the number of homes on the market are generating a glimmer of hope for the California housing market in 2025, possibly ending a rather dark stretch during the past few years.
But affordability – a combination of home prices and mortgage rates – is the key to jump-starting sputtering home sales and reach the pre-pandemic activity of a so-called “normal” market of five years ago, according to economists and housing experts.
And in a state where fewer than one of every five households can afford to buy the median-priced home, getting home-shoppers to become homeowners is tough. Very tough.
Plus, many homeowners with below-market mortgage rates – many in the 2.5%-3.5% range – are reluctant to sell and give up their affordable payments for much-larger monthly strokes.
“It’s the great stay,” says Mike Simonsen, founder and president of Altos Research in San Francisco. “There is no signal anywhere of a big surge of sellers. They have a great deal on their house and their jobs.”
‘A VERY DIFFICULT YEAR’
The one-two combo of affordability for buyers – especially first-time homeowners – and four decade-low mortgage rates for many current owners has affected the housing market from Baltimore to Burbank. Very few consumers can buy, while many home sellers are holding on to their near-record-low mortgage rates like gold bars.
“2024 has been a very difficult year on many fronts,” says Lawrence Yun, chief economist for the National Association of Realtors. September home sales dropped to the lowest level since 2010. “We did not get the home sales recovery this year after an awful 2023.”
But the deep thaw has started to melt during the past few months. California’s active listings increased 27% in November compared to a year ago—and have improved year-over-year for nine consecutive months, according to the California Association of Realtors. Altos Research estimates listings have increased an even more robust 29% in 2024 compared to a year earlier.
The ice age may be over, but it’s far from the historic average of homes on the market in California. The state’s active listings – even with the impressive jump during the past nine months – are down 15% compared to 2019.
“How many sellers will take that leap of faith?” asks housing expert Todd Teta, chief product and technology officer for ATTOM Data in Irvine.
CAR FORECASTS DOUBLE-DIGIT SALES GAINS
It’s a hard-to-answer question, with forecasts ranging from cautious optimism to expect more of the same at least for much of 2025.
The California Association of Realtors forecasts a 10.5% increase in sales to 304,000 homes, which would be the most since 2022. CAR predicts an almost 7% increase in sales in 2024 compared to a year earlier, ending two consecutive years of 20%-plus declines. But the double-digit gain expected this year follows some dismal performances, with sales of fewer than 300,000 in 2023 and 2024 (see table, below).
“An increase in homes for sale, along with borrowing costs, is expected to entice more buyers and sellers to enter the market in 2025,” says CAR immediate past president Melanie Barker, a real estate broker in the Yosemite region. “Demand will grow as we start the year with the lowest interest rates in more than two years, particularly for first-time buyers. Meanwhile, would-be home sellers held back by the lock-in effect will have more flexibility to pursue a home that better suits their needs as mortgage rates continue to decline.”
However, there is no sign that rates will decline much in 2025. The Federal Reserve has been hesitant to drop interest rates while inflation remains a worry. The Fed has cut interest rates three times in 2024, but forecasts only two cuts in 2025.
For buyers, the mortgage rates they see today – about 6.5% to 6.8% — could remain for much of the year.
“There is no sign of significant improvements on mortgage rates,” says Simonsen, who added that a bump higher could have a more dramatic effect on listings and sales.
Of course, higher home prices – a challenge for buyers but a gift for sellers – are another issue for the market.
| Homes sold | % vs. a year earlier | Median home price | % vs. a year ago | |
|---|---|---|---|---|
| 2018 | 402,600 | -5.2% | $569,500 | +5.9% |
| 2019 | 398,000 | -1.2% | $592,400 | +4.0% |
| 2020 | 411,900 | +3.5% | $659,400 | +11.3% |
| 2021 | 444,500 | +7.9% | $784,300 | +18.9% |
| 2022 | 343,000 | -22.9% | $822,300 | +4.5% |
| 2023 | 257,900 | -24.8% | $814,000 | -1.0% |
| 2024-p | 275,400 | +6.8% | $869,500 | +6.8% |
| 2025-f | 304,400 | +10.5% | $909,400 | +4.6% |
P= projected; f= forecasted
Source: California Association of Realtors
HIGHER PRICES THANKS TO A SHORTAGE OF HOMES
CAR forecasts a modest 4.6% increase in the median home price, reaching a record $909,400 in 2025, about double the price from a decade ago. California’s median home price – where half the homes sell for more, the other half for less – is among the priciest in the U.S., and almost $500,000 more than the national average.
While affordability is a big concern, a critical shortage of homes – the state needs at least 2.5 million more units – will keep prices rising, housing experts say.
“Although inventory is expected loosen as rates ease, demand will increase with lower mortgage rates and limited housing supply, which will push home prices higher next year,” said Jordan Levine, senior vice president and chief economist for CAR. “Price growth is expected to be slower, but the housing shortage will keep the market competitive outside of big economic shocks, so prices will still rise. Assuming a healthy economy in 2025 that slows but doesn’t shrink, home prices should rise modestly across California.”
The Central Coast boasts some of the largest home price gains in 2024. ADOBE STOCK
If the economy grows and inflation eases, the Golden State could return to a pre-pandemic housing market in 2026, Simonsen says.
Higher mortgage rates “had a pretty traumatic effect,” Teta says. “There are still a lot of unknowns in the market.”
But things are better, especially compared to the past three years.
“Maybe the worst is coming to an end,” says Yun of NAR.
