California’s housing market has been a rollercoaster ride in recent years. Homeownership has become a distant dream for many in California. Besides, there is always an added element of uncertainty because of wildfires and other natural disasters. So, what does the future hold for the California housing market?
If you are wondering whether we are headed for a boom or bust, the California Association of Realtors (C.A.R.) housing forecast 2025 is here to make things clearer for you. C.A.R. has predicted that we will see a moderate improvement in home sales. Home prices will be relatively steady, but there will be some persistent affordability challenges.
Let’s take a look at what buyers, sellers, and investors should expect from the California housing market in 2025!
Is Stabilization on the Horizon in 2025?
C.A.R. predicts that home sales will increase by 10.5% in 2025, reaching approximately 304,400 units, compared to 275,400 in 2024. After a couple of years of market volatility, this growth signals a potential rebound. However, economic uncertainties still loom, including inflation and fluctuating interest rates. These factors can affect buyer sentiments and how the market may evolve.
This projected rise in sales shows that despite the challenges, California’s housing market may be on its way to recovery. However, it’s important to note that the rise in sales doesn’t necessarily indicate a booming market but rather a correction from previous downturns.
What are the Persistent Challenges in Housing Affordability
One of the biggest concerns in the 2025 forecast is housing affordability. According to the C.A.R. forecast, you can expect stability here, as affordability will remain steady at 16% in 2025. It is projected to be the same towards the end of 2024 but is down from 17% in 2023. It means that only 16% of Californians will be able to afford a median-priced home in 2025, which could be a significant barrier for first-time homeowners and low-income households.
While sales may be increasing, the affordability crisis means that only a small portion of the population can participate in the market. This affordability crisis shows the socioeconomic disparity in the state, where homeownership remains a distant dream for many due to high prices and stagnant income growth.
Slow but Stable Growth in Home Prices is Expected
The forecast projects that the median home price in California will climb by 4.6% to $909,400 in 2025. This follows a projected increase of 6.8% to $869,500 in 2024, continuing the trend of rising home prices. While this growth may benefit homeowners and sellers, it is not a booming trend but rather a gradual one. The minimal increase shows that the market is cooling off. However, as the wages are not keeping up with these price hikes, there will be affordability challenges.
For buyers, this steady increase in home prices could mean that waiting to purchase might lead to higher costs, even if mortgage rates stabilize. On the flip side, for those looking to sell, the sustained rise in home values may provide an opportunity to capitalize on strong demand.
Mortgage Rates Will Remain a Market Driver
Mortgage rates are one of the most critical factors affecting the housing market. In 2025, rates are expected to average 6.3%, slightly lower than 2024’s average but still significantly higher than historical lows.
Higher mortgage rates impact buyers’ purchasing power, making it more expensive to finance homes. For those on the fence about buying, these rates might push them to reconsider, especially in conjunction with high home prices. However, for those who have been waiting for a more stable market, this could be the right time to enter.
Supply vs. Demand: The Housing Shortage
California’s housing market is also shaped by an ongoing shortage of available homes. This supply shortage continues to place pressure on buyers, who face limited options and high competition. While the state has made efforts to address this housing crisis, the forecast suggests that supply will remain constrained.
For buyers, the lack of supply means that they will have fewer choices and may need to act quickly when a property becomes available. Sellers, on the other hand, could still benefit from the competition among buyers, even if price growth remains subdued.
Can Economic Risks Derail the Recovery?
While the forecast suggests moderate improvements, there are significant risks that could derail the housing market recovery. Inflation, which has remained persistently high, could reduce consumer spending power. Additionally, the potential for a recession looms, which could decrease demand for housing.
Interest rates remain another wild card. If the Federal Reserve continues to increase rates to combat inflation, mortgage rates could increase further, limiting homebuyer affordability even more. These economic factors create an uncertain environment where both buyers and sellers must be cautious.
Are We Moving Towards a Boom or Bust?
So, will the California housing market experience a boom or bust in 2025? The forecast suggests that neither extreme will occur. Instead, we’re likely to see a market that stabilizes, with modest increases in sales and prices but ongoing affordability issues. For buyers, this could be an opportunity to enter the market as conditions level out, but economic risks remain a concern. Sellers, meanwhile, may face a more competitive market as demand adjusts to the affordability crisis and mortgage rate fluctuations.
The housing market in California remains complex, but with careful planning and understanding of the forecast, both home buyers and sellers can effectively tackle the challenges of the market in 2025.
