2025 Housing Forecast: Calm Transition or Chaos?
Economists are Cautiously Optimistic
By M.C. Dwyer
The 2025 economic and housing outlook for California and the U.S. is a mixed bag: forecasts predict modest price growth and a slight rebound in the number of sales.
But costs constrain home buyers — California’s affordability just dropped to a depressingly low 14%, about half the rate of 30% back in 2020 (which fell 7% from 1999). One problem is, California’s median household income, $75,000, is still lower than pre-COVID. Just to qualify for an 80% loan on the average 1 million dollar home in the Santa Cruz Mountains requires an income between $250,000 and $300,000. Fortunately, we have different kinds of loans for those without a 20% downpayment.
For decades, California has built far fewer homes than needed, with local opposition stifling new building permits despite state mandates. This depresses post 2020 fire home rebuilding too.
Meanwhile, the $2 million plus home segment remains active. Affluent home buyers are simply less affected by economic concerns.
The California Association of REALTORS® (CAR) anticipates a 3.2% rise in prices, pushing the median to around $900,000, with sales climbing to 300,000 homes sold — above 2024’s lows and well over the 250,000 units sold in 2023.
Insurance challenges affected nearly 45% of rural buyers in 2024, up from 28% in 2023. Still, potential policy changes like increased capital gains exemptions and first-time buyer credits could mean more homes for sale and hopefully help entry level buyers, freeing up the market.
Housing economists, including Lawrence Yun of the National Association of REALTORS (NAR) and Zillow’s Orphe Divounguy, predict home price growth of 2-2.6%, with sales units 7-12% higher. 4.3 million US homes are forecast to sell during 2025. 30 year fixed rate mortgage rates are projected to stabilize between 6-6.5%, helping more buyers afford homes. The forecast combination of slower price appreciation and more homes for sale could provide relief to home buyers. Notably, most sellers become buyers.
Stubborn inflation, rising federal deficits expected under the new administration, when combined with sluggish wage growth, are risky to the market. Demographic shifts, life events, and higher housing inventory will influence the market. Experts highlight regional disparities: of the top ten markets expected to stagnate or decline, three are in California. But California doesn’t even appear on the list of top ten growth markets. Two of the top 10 are in Ohio! Hartford CT is forecast to lead the pack at 4.2% higher prices, followed by Providence RI & Miami FL at 3.8-3.9%, Charlotte NC and Indianapolis IN at 3.3%, Columbus OH, Buffalo NY, Riverside CA, and Richmond VA all between 2.9-3%, #10 Cincinnati OH 2.8% higher prices.
California’s Insurance Shake-Up: Hope for Santa Cruz Mountains homeowners or Higher Prices?
We’re beginning to see the results of California Insurance Commissioner Ricardo Lara’s new regulations to help our insurance crisis, particularly in high fire risk areas like the Santa Cruz Mountains. The new rules allow insurers to use their own, updated catastrophe models and climate change projections to set rates on re-entering the market. In exchange, insurers are required to cover 85% of homes in designated high-risk areas. The new mandatory coverage rules are hoped to help regions previously dismissed as too risky by the insurers.
Farmers Insurance, the state’s second-largest insurer, aims to add 2500 home policies to its current 7,000 new policies per month, simultaneously diversifying into renters, condo, and umbrella policies. Hundreds of thousands of homeowners policies were cancelled over the last few years. The quantum exits left nothing but the insurer of last resort, Cal Fair Plan, which wasn’t designed to insure this many homeowners.
Commissioner Lara thinks these reforms will stabilize the home insurance market by mid-2025. While I’m cautiously optimistic about the future of our home insurance market, we’ll see if these measures make insurance both accessible and affordable for high-risk regions.
Inflation, Mortgage Rates, and Politics: How Current and Future Policies could affect your real estate future
In December, the politically independent Federal Reserve (Fed) dropped its benchmark interest rate by another 0.25%. Since September ’24, rates are 1% lower, but mortgage rates rose 0.7% unexpectedly. Why? Investor sentiment: the bond market’s negative reaction to a string of strong economic results. Mortgage rates are more influenced by 10-year Treasury bond yields than the Fed. Also, rising federal deficits — growing government debt because government continues to spend more than it takes in — keeps long-term borrowing costs high.
Inflation is under control after peaking in 2022, but still running at 0.7% above the Fed’s 2% goal. Grocery prices rose 22% during the current administration, largely due to global supply chain disruptions during COVID, geopolitical conflicts and wars, diseases, droughts and floods’ disruption of food production. Critics argue that the current administration failed to communicate how these global factors increased inflation. Many voters probably don’t understand that the politically independent Fed is responsible for controlling inflation, not the president.It’s also possible many didn’t realize that America had far lower inflation than the rest of the world.
It’s estimated that the incoming president’s proposed fiscal policies, including tariffs, tax cuts and increased government spending, could increase the federal deficit by as much $15 trillion over the next decade. Economists warn this may drive inflation up and increase rate volatility — ironic since the new administration may have won partially by addressing lower- and middle-class frustrations over rising costs. There’s a complex relationship between politics, inflation, and mortgage rates that I think will be unpredictable in the beginning of the next four years.
Outlook for Santa Cruz County
Our housing market is deeply affected by national trends like mortgage rates. Lately, when rates move above 7%, REALTORs® see buyers pull back. The unusually high cost of home insurance adds a big hurdle, particularly for entry level buyers up to the 1 million dollar segment. Yet, higher end price brackets are less affected. Many highly paid employees enjoy the luxury of working at home: high speed internet is available to most of the County. Santa Cruz Mountains residents enjoy a reasonable commute to most employers. Buyers are attracted to our lovely climate, relaxed lifestyle, plethora of parks and open spaces, and desirable location between the Monterey Bay and Silicon valley. But all these attractions drive home prices ever higher. It’s become increasingly difficult over the last 20 years to realize my personal mission of helping long-time renters and young people achieve financial growth through home ownership.
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