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Home prices in California declined during the second half of 2022 and into 2023, as part of a nationwide real estate cooling trend. But over the past several months, California home prices have been rising again due to limited inventory.
Forecasts suggest that house values in California could begin to rise at a moderate pace through the end of this year and into 2024. This would mirror the general outlook for the nation as a whole, and low supply levels have a lot to do with it.
Here’s an update on current home price trends across the state of California, with a “best guess” outlook stretching into 2024.
Is California’s Home-Price Downturn at an End?
Historically speaking, home prices in California tend to rise steadily over time. That’s because the Golden State often experiences supply shortages that increase the demand for homes. Many states are experiencing such shortages in 2023, but the situation is more severe in California’s major cities and metro areas.
Starting last summer, the statewide median home price began to decline. That same trend played out in cities all across the country, and mortgage rates had a lot to do with it.
Mortgage rates more than doubled during 2022, leading to a reduction in buyer demand. With fewer buyers in the market bidding on houses, home prices began to decline nationwide. This downturn continued through the second half of 2022 and into the first part of this year.
More recently, however, California home prices have shown some upward momentum. The statewide median house price has risen for the past three months in a row.
According to a July 2023 report from the California Association of Realtors, the statewide median home price “exceeded $800,000 in June for the third straight month, edging up 0.3 percent from May’s $836,110 to $838,260 in June.”
So it seems that the state of California is going through a similar transition phase as other states across the country. After skyrocketing during the pandemic years, and slowing down through 2022, home prices now appear to be turning north again.
Tight Supply: The Primary Driver in All of This
Home sales in California have actually declined over the past couple of months. Normally, such a reduction in demand from buyers would either keep home prices flat or cause them to decline. But that’s not the case in California.
Like other housing markets across the country, house values in California are currently rising despite a modest decline in sales. This creates something of a paradox. Why are home prices rising at a time when buyer demand has softened?
The answer has to do with inventory.
Housing market supply levels in California have declined steadily since the start of 2023. The short version is that there are far fewer homes listed for sale today than there were seven or eight months ago.
So even though buyer demand has declined a bit over the past year, those buyers who are still in the market are competing for a much smaller number of properties. These trends have put upward pressure on prices, resulting in the monthly gains that have occurred since late spring.
Freddie Mac’s housing market analysts summed it up nicely, when publishing their latest mortgage rate report:
“The combination of upbeat economic data and the U.S. government credit rating downgrade caused mortgage rates to rise this week. Despite higher rates and lower purchase demand, home prices have increased due to very low unsold inventory.”
To put it differently: Tighter inventory conditions have made the real estate market more competitive again, despite the effects of higher mortgage rates.
Homes Are Selling Faster As Well
Housing market analysts and economists often measure the overall speed or pace of a real estate market by using a measurement known as “days on market,” or DOM. This metric indicates how long homes stay on the market before going under contract or being sold.
A higher number of “days on market” indicates a slower market, while a lower number reflects a fast-moving and competitive real estate scene.
Since the start of 2023, the statewide median days on market within California has declined steadily. Essentially, this means the real estate market has accelerated and that homes are selling more quickly now than at the beginning of this year.
The state’s median DOM rose above 50 days at the end of 2022, back when the real estate market was cooling and slowing down. Since then, however, it has dropped for several months in a row and is now hovering in the mid-20-day range.
All of these trends are connected:
- Higher mortgage rates have made some homeowners more reluctant to sell their houses, since they would likely take on a higher interest rate with their next purchase. This is often referred to as the mortgage rate “lock-in” effect.
- This in turn has caused a steady decline in housing market inventory levels across the state of California.
- With fewer homes on the market, buyers are once more competing fiercely with one another, and that’s driving up prices.
So, getting back to the question we started with. What’s the outlook for home prices in California? Will they keep rising through this year and into 2024? Will they flatten out or drop again?
No one can predict future housing market trends with complete accuracy. But it seems that the current supply-and-demand situation is unlikely to change dramatically anytime soon. So the most likely scenario is that home prices in California will continue to rise at a moderate pace over the coming months.
Given that outlook, home buyers who are considering a purchase in the near future might want to take action sooner rather than later.