Last month, the California Association of Realtors® (C.A.R.) released its annual housing market forecast, offering insights into how the housing market is projected to perform in 2025, based on current trends and data. The report projects a positive outlook, anticipating growth in both home sales and prices as more buyers and sellers reenter the market, encouraged by lower mortgage rates and improved housing supply.
The key takeaways from the report are as follows:
- Sales of existing single-family homes are expected to increase by 10.5%, with projected sales reaching 304,400 units in 2025, compared to 275,400 in 2024.
- Median home prices are forecast to rise by 4.6%, reaching $909,400 in 2025, following a projected increase of 6.8% in 2024.
- Housing affordability is expected to remain steady at 16%, similar to the projected rate for 2024.
Rising Home Sales and Prices
The 2025 forecast indicates a rebound in the housing market, fueled by more favorable mortgage interest rates. Existing single-family home sales are forecast to rise by 10.5%, totaling 304,400 units. This increase marks a continued recovery from 2023’s pace of 257,900 units.
The median home price in California is also expected to increase, reaching $909,400 in 2025. This 4.6% growth follows a significant 6.8% rise in 2024. A tight housing inventory and a competitive market will continue to drive home prices up, although at a more moderate pace compared to the past year.
C.A.R. President Melanie Barker expressed optimism about the market’s potential in 2025:
An increase in homes for sale, along with lower borrowing costs, is expected to entice more buyers and sellers to enter the market in 2025. Demand will grow as we start the year with the lowest interest rates in more than two years, particularly for first-time buyers.
Despite these positive trends, housing affordability remains a challenge, with only 16% of households projected to be able to afford a median-priced home next year, reflecting no change from 2024.
Mortgage Rates and Housing Supply
Mortgage interest rates are expected to decrease in 2025, providing relief to both buyers and sellers. This reduction will help ease the "lock-in effect," where current homeowners feel financially constrained by their existing low-rate mortgages, making them less inclined to sell. As a result, more homes are expected to come on the market, leading to a projected 10% increase in active listings.
"Although inventory is expected to loosen as rates ease, demand will also increase with lower mortgage rates and limited housing supply, which will push home prices higher next year," said C.A.R. Senior Vice President and Chief Economist Jordan Levine. "Price growth is expected to be slower, but the housing shortage will keep the market competitive."
The improved lending environment, coupled with better inventory conditions, is anticipated to bring more flexibility to the market, benefiting both buyers and sellers. While supply is expected to improve, the overall housing shortage will keep the market competitive, ensuring continued upward pressure on prices.
Economic Factors Underpinning the Forecast
The 2025 forecast reflects broader economic trends that will influence the housing market. The U.S. gross domestic product (GDP) is expected to slow to 1.1% in 2025, down from a projected 1.9% in 2024. California's job market will also see more modest growth, with nonfarm job growth projected to drop to 1.1% in 2025, contributing to a slight rise in unemployment to 5.6%.
Inflation is set to moderate, with the Consumer Price Index (CPI) forecast to average 2.0% in 2025, compared to 2.9% in 2024. This moderation in inflation is expected to help bring mortgage interest rates down, with the 30-year fixed-rate mortgage projected to average 5.9%, a decrease from the 6.6% rate forecast for 2024. Although still higher than pre-pandemic levels, this decline will provide more purchasing power for buyers and stimulate market activity.
Levine summed up the forecast by stating:
Assuming a healthy economy in 2025 that slows but doesn’t shrink, home prices should rise modestly across California, with the state’s median price climbing 4.6 percent to reach $909,400 in 2025.
As these economic conditions unfold, the housing market is poised for a period of modest but sustained growth. For buyers and sellers, 2025 could offer more favorable conditions, though challenges around affordability and supply will persist.
