September 22, 2025 – California’s housing market is poised for gradual improvement, with statewide sales of existing single-family homes projected to remain steady in 2025 and inch up by 2% in 2026, supported by moderating mortgage rates and improving affordability. The Federal Reserve’s recent decision to cut the federal funds rate for the first time in 2025 will also help the market by offering further relief to buyers and the broader economy. While builders remain cautious and labor market uncertainties persist, resilient consumer spending and early signs of a rebound in home sales suggest that, despite ongoing challenges, the outlook for the coming months is brighter than recent trends alone might indicate.

California home sales and median price are projected to inch up as housing affordability improves: The statewide sales of existing single-family homes will remain virtually unchanged from last year, dipping 0.1% to reach 269,020 in 2025 and are projected to inch up to 274,430 in 2026, an annual increase of 2.0%. The average 30-Year FRM will moderate slightly to 6.6% in 2025 but will decline more solidly to 6.0% in 2026. Despite softening home prices in recent months, lower interest rates and a slightly improved affordability environment will give room for prices to move up in the coming year. Assuming a healthy economy with either no recession or a very mild recession in 2026, home prices should rise moderately across the state. The state’s median price is expected to have slow growth this year and next year, with the California median price up 1.0% to $873,880 in 2025 and will reach a new high of $905,000 in 2026. Housing supply in 2026 will continue to improve and will remain near pre-pandemic levels, with active listings up nearly 10% as market conditions and lending environment improve.

Fed reduces the fed funds rate for the first time in 2025: The Federal Reserve decided to cut the federal funds rate by 25 basis points (bps) at its latest FOMC meeting last week. The rate cut was the first reduction in nine months, and it was the first downward adjustment in 2025. The Fed’s latest announcement is a reflection of the central bank’s “shift in the balance of risks,’ as it begins to switch its focus more on employment than on inflation. While overall price growth remains a concern in the short term, the deterioration in job market in recent months is posing more downside risks to the health of the economy in the immediate term. The updated Fed’s projection indicates that the median policy rate could be reduced by an additional 50 bps by the end of 2025 but may only be down by 25 bps for the entire year of 2026 as the Fed predicted only one rate cut next year. There is a lot of uncertainty in the next 12 months, however, as the labor market outlook remains muddied and the extent of the tariff impact on inflation is unsure. If the economy turns out to be weaker than predicted, it is possible that the Fed will put more weight on employment and will reduce rate a couple more times in 2026.

Sales at the state level remain low but expected to improve in coming months: California home sales in August inched up from the prior month but remained below last year’s level. Sales of existing single-family homes at the state level climbed 0.9% month-over-month to 264,240 last month and were virtually flat (-0.2%) from the same month of 2024. With sales declining for the fifth consecutive month on the year-over-year basis, total homes sold for the first eight months remained below last year’s level for the same period. Meanwhile, August pending sales in California edged higher (+0.2%) on a year-over-year basis for the first time in nine months and rose 8.3% from July, as mortgage rates fell to a 12-month low at the end of August. With mortgage rates bouncing back from the recent low but remaining well below levels observed three months ago, home sales could see some improvement in the months ahead.

August retail sales remain solid despite slowing job growth: Americans continued to spend last month, with August retail sales growing solidly from July as back-to-school shopping boosted spending. U.S. retail sales rose 0.6% last month after two consecutive months of decent growth in June and July. On a year-over-year basis, August sales were up 5% and had the strongest clip in the past four months. The increase was partly due to consumers paying higher prices, but retail sales after adjusted for inflation remain positive and still look decent. Online spending grew strongly by 2% from the prior month, while restaurants (+0.7%) and auto sales (+0.5%) also contributed to a solid growth in overall retail sales last month. The latest momentum in spending suggests that consumers remain resilient, but a weakening labor market will likely put their purchasing power to a test in the coming months. 

Single-family housing starts hit 13-month low as builders remain cautious: Housing starts fell in August after a brief bounce back in July as both single-family and multi-family declined last month, according to the latest Census Bureau report. Overall housing starts dropped 8.5% from July and posted a seasonally adjusted annual rate of 1.307 million last month. The dip was partly driven by a slide in single-family starts, which dipped 7% from July and fell to the lowest level in 13 months. Multifamily starts also dropped substantially by 11% month-over-month, hitting the lowest level in three months. Low housing demand, tariff uncertainty, and tightening labor supply are factors that contributed to builders remaining cautious about construction activity. Housing permits continued to suggest a soft outlook for the industry and the overall figure in August dipped 3.7% from July and declined 11.1% from a year ago. Single-family permits slipped month-over-month with a dip of 2.2% and were down year-over-year by 11.5%. The West (-6.9%) continued to have the biggest monthly drop in single-family permits, but the Northeast (-1.8%) and the South (-1.5%) also pulled back last month. While housing demand could improve in the coming months as mortgage rates inch further down, builders will likely exercise with caution in Q4 as economic concerns remain.

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