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The Federal Reserve’s decision to cut the federal funds rate by half a percentage point has infused some much-needed hope into the housing industry, as easing mortgage rates are expected to unlock a new wave of consumer activity — especially in California.
The California Association of Realtors said on Monday that annual single-family home sales in the state are projected to rise 10.5 percent from 275,400 units by the end of 2024 to 304,400 units by the end of 2025.
Melanie Barker | Credit: LinkedIn
“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,” CAR President Melanie Barker said in the report. “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,” she added.
As the consumer price index (CPI) moves closer to the Fed’s target of 2.0 percent, CAR predicts the average 30-year fixed rate mortgage rate will settle around 5.9 percent in 2025. Although 5.9 percent is a far cry from the historical lows seen in 2021 and 2022, the report noted it’s much lower than the 50-year average of 8 percent.
Easing rates should lead to a double-digit boost in existing-home inventory, with active listings projected to rise 10 percent by the end of 2025. That boost is expected to slow annual median home price growth to 4 percent in 2025; however, the state’s median home price would still be one of the highest in the nation at $909,400.
“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,” CAR Senior Vice President and Chief Economist Jordan Levine said in the report. “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.”
