Following the first rate cut by the Federal Reserve in years last week, consumer confidence has slid—reflecting the normalizing labor market and more muted economic growth—but income and spending continue to rise, according to the recent “2025 Economic & Housing Market Forecast” from the California Association of Realtors.
While new home sales have yet to increase despite the recent rate cut, demand is already picking up and preliminary indications suggest an unseasonably strong winter in California, the forecast noted.
Home sales are expected to rise by more than 10% next year, says the forecast, as dwindling interest rates help to bolster demand and open up a critical housing supply to generate a second consecutive uptick in transactions.
At the same time, home prices are also expected to continue their upward trend despite an increase in supply, which is still very tight by historical standards. The inventory will be up from the past two years, but, according to the California Association of Realtors forecast, it will only help to normalize price growth from the double-digit range, where it was earlier this year, into the mid-single digits in 2025.
Meanwhile, the economy is currently forecast to avoid a recession—a net positive for housing next year, the report posited.
Although rates have dipped more than 100 basis points over the past 3 months, new home sales also retreated again in August, shrinking by 4.7%, said the California Association of Realtors report. This matches the results seen in the existing resale market earlier this month and suggests that the positive benefits of lower rates are moving against the typical fall seasonal slowdown.
However, with the Fed’s recent rate cut and mortgage rates stabilizing in the low-6% range, demand for new and resale homes is expected to improve.
As Houzeo.com noted, the current median home sale price of $855,100 is stable and rising steadily at 7.4% year over year. Moreover, homes spend only 30 days on the market, said Houzeo, indicating that the California real estate market is pretty much competitive.
The average months of home supply are 3 months year over year, said Houzeo, adding that a market with fewer months of supply indicates a sellers’ market. However, the number of homes sold dropped by 8.4% year over year in June.
There were 24,244 homes sold in June 2024, down from 26,459 homes sold in June 2023.
California data compiled by California Association of Realtors shows that the state could be in for an unseasonably strong winter, said the California Association of Realtors report. While pending sales are typically dropping off much more precipitously by this time of year, this stability indicates that year-to-year growth rates for closed sales could accelerate during the final quarter of 2024, said the report.
Finally, despite the Fed rate cuts, consumers may be learning that waiting on the Federal Reserve to deliver cheaper mortgage rates may not be the recipe for success, said California Association of Realtors.
When the Fed acts according to expectations from the market, the market reaction is minimal because these expectations have already been priced into the market, said the report. Indeed, even before the Fed had announced their first rate cut of 50 basis points, the Treasury market and mortgage rates had already begun to fall from the mid-7s to the low-6s. When the Fed finally announced their rate cut, California Association of Realtors noted, mortgage rates actually increased slightly to roughly 6.2%, where they still stand this week.
