A hub for several hundred-billion-dollar industries–and even one in the trillion-dollar range–California has long been an expensive place to live, with prices seemingly only capable of rising each year. However after recent events, the California housing market is seemingly on the cusp of a major shift. The question “Is the California housing market cooling down?” is on the minds of millions of homeowners, investors, and industry professionals in and out of the state.
At Defy Mortgage, we specialize in providing non-traditional loan options to self-employed individuals, freelancers, business owners, entrepreneurs, real estate investors, and other borrowers who may not have a conventional income. Our expertise ranges from bank statement loans and P&L loans to cash-out refinance and HELOCs.
Serving borrowers across the US, including California, we stay on top of all current events that could alter the markets we operate in. In this blog, we’ll bring you the latest expert opinions and projections on the current state of California real estate, discuss the telltale signs of a cooling market, and what you can do to weather the uncertainty that might persist over the next few years.
Let’s get right into it.
Current Trends in the California Housing Market
The California housing market is generally showing signs of stabilizing or cooling. High mortgage rates, slow job growth, and ongoing migration have decreased demand for housing. The recent wildfires have also caused property values in LA County to decrease, although the effect seems localized to that area.
Outlook on California’s housing market is fairly uncertain. New policies intended to ease housing costs are coming to fruition. If implemented well, these legislations could revitalize the market. On the other hand, specific areas of California, like San Diego and Fresno, are steadily growing in popularity for prospective homebuyers in recent months, signifying a potential market rebound beginning in these areas.
Mortgage Rate Trends
In September 2024, the California Association of Realtors predicted that the average 30-year fixed mortgage interest rate was going to decline to 5.9% in 2025, down from 6.6% in 2024. However, following the various economic shifts that have happened since, expert opinions have begun to favor California mortgage rates staying firmly between 6% and 7% for at least the next two years.
One of the main culprits for this is persistent inflation. Annual inflation rose for the fourth straight month in January 2025, recovering to 3% after a relative dip in late 2024. With inflation returning to this level and currently showing no signs of slowing, mortgage lenders are likely to raise mortgage rates in order to offset its effect.
Strong job market performance can also be affecting mortgage rates. In spite of the LA wildfires, the job market remains healthy in numerous industries, although growth has slowed down. With a healthy job market, demand for mortgages is less likely to drop significantly, and thus lenders have less reason to lower mortgage rates to make them more affordable. However, mortgage rates are the primary factor being attributed to low home sales in many areas of California.
Economic Conditions
California’s non-farm job growth rate is anticipated to slow to 1.1% in 2025, compared to 1.5% in 2024, reports the California Association of Realtors. Consequently, the state’s unemployment rate is expected to rise slightly to 5.6% from 5.4% in 2024.
That said, there are reports that California is poised for an economic resurgence. According to the Public Policy Institute of California, the state’s economy is showing signs of recovery, with moderate wage growth and increased economic activity projected in various sectors.
However, as noted by CalMatters, the recent wildfires have had a significant impact on both the income and spending sides of the state budget. The disaster has made economic activity in Southern California grind to a halt, with a large portion of state funds funneled into fire suppression and recovery aid.
Legislation & Policy Changes
California is enacting several legislations in 2025 that stand to change the real estate landscape. When signed into law, legislation such as Senate Bill 450 will allow duplexes and lot splits on single-family residential lots, while Assembly Bill 2553 will encourage higher-density housing near public transit stops by removing minimum parking space requirements. Policies like these will increase the amount of space available for housing, potentially making homes more affordable.
Migration Trends
According to the most recent data from the U.S. Census Bureau, more people are still leaving California than moving in. Between 2020 and 2024, California experienced a net loss of approximately 500,000 residents due to domestic migration. This trend is attributed to factors such as high housing costs, taxes, and the state’s cost of living, which is generally around 30% higher than the average cost of living across the United States.
Natural Disasters
With the uptick in sales in 2024, some analysts were optimistic about the future of California’s housing market. However, the recent Los Angeles wildfires have completely inverted this outlook for most, driving many more people to leave the state and exacerbating the effect of California’s already dwindling population due to low birth rates and migration trends.
Property values have plummeted in the areas affected by the wildfires, such as Malibu, Santa Monica, and other cities throughout Los Angeles County, with some homes in Altadena and the Pacific Palisades even selling for half-price. The fires have resulted in estimated insured losses of at least $28 billion. The increasing weather risks, along with California’s restrictive policies, are pushing major insurance carriers to withdraw from the state, creating more barriers to homeownership.
Growth of Areas Around LA County
The devastation and evacuation of Los Angeles County have essentially crippled its housing market, but other parts of California are experiencing the opposite. Inland metro areas like Sacramento and Fresno, for example, have been on a steady upward trend in construction, with permits increasing even as construction in places like San Jose and San Francisco steeply fell.
San Diego County is also showing signs of accelerated growth, with San Diego City remaining one of the most attractive housing markets in the US. Following the displacement of many residents in LA County due to the wildfires, it is likely that some of them will settle in these metro areas and fuel further growth.
Signs That the California Housing Market May Be Cooling Down
Despite some optimistic perspectives on the trajectory of the California housing market, the prevailing signs show that housing demand and prices in California are starting to plateau. Here are some of the clearest signs that California real estate is on a cooling trend:
Home Prices Stabilizing
In general, California home prices appear to be plateauing. After a significant rebound following a large dip in January 2024, prices eventually settled around $800,000-$850,000 over the rest of the year. However, regional differences remain significant.
In areas like San Jose and Tustin, prices are beginning to rise once more. San Jose’s prices are up 11.2% year-over-year in January 2025, compared to 6.6% in December 2024. Tustin recovered to a 10.1% year-over-year increase in January after a dip of 9.1% in November.
Meanwhile, home prices in some expensive locales, like San Francisco and Oakland, are beginning to trend towards pre-2020 levels. San Francisco, in particular, has been in a pricing freefall for several years now, as people have been leaving the area in droves due to various economic issues, most recently the massive tech layoffs in the Bay Area beginning in 2022.
Median list prices in San Francisco County decreased by a precipitous $400,000 from its $1.6 million peak in 2022, settling at $1.2 million as of January 2025, according to Redfin. Oakland is on a similar downward trend, with its median home price decreasing from $1.0 million in 2022 to $705,000 in January 2025.
The California Legislative Analyst’s Office notes that areas with the fastest growing cost of homeownership are focused in Southern California, with counties like Humboldt, Trinity, and Mendocino experiencing the most significant price growth slowdowns. Outside of the expensive markets in Southern California, which are likely going to be more expensive as people fleeing the LA fires search for living arrangements within the state, prices are generally stabilizing.
Longer Time on Market
Homes are remaining unsold for longer periods. Realtor.com reports that, on average, homes stayed on the market for 46 days in 2024, similar to the average in 2023. However, in the last three months of 2024, homes stayed on the market for an average of 5 days longer than they did in 2023, signaling reduced buyer urgency.
Decreased Sales Volume
California has experienced a prolonged period of lower sales. Since it peaked at 445,000 units sold in 2021, single-family home transactions have stayed far below the pre-2020 yearly average of 400,000 units, with 335,934 sold in 2022 and 260,189 sold in 2023. Inventory levels rose 24.1% year-over-year in September 2024, reflecting this decline in demand. That said, there was a slight increase in sales in 2024, rising 1.5% above the 2023 figures to 274,552 units sold.
What This Means for Real Estate Investors
Real estate prospects in California have been irreversibly altered by the far-reaching effects of the California wildfires. Beyond this, however, experts attribute the lack of movement in California’s housing market to low buyer enthusiasm, which is expected to stay low as mortgage rates and uncertainty due to inflation remain high. Here’s what it could mean for real estate investors if current trends persist:
Opportunities:
- Strategic Acquisitions: Declining or stabilizing prices in certain regions can make property acquisition more affordable. A previously overheated market can cool off significantly before eventually recovering, giving investors the opportunity to buy in during cool periods and turn a large profit when the market turns hot again.
- Enhanced Rental Yields: Rental demand tends to increase in markets where homeownership is less attainable. This leads to improved rental yields, which can increase the viability of an investment strategy that uses debt service coverage ratio (DSCR) loans. Lawrence Yun, chief economist for the National Association of Realtors (NAR), predicts that there will be a massive short-term burst of rental income from heightened rates due to displaced residents who want to stay in the area.
- Growing Demand for Alternative Housing: Even before the Palisade fires, Los Angeles County has played host to a rapidly growing market for alternative housing, such as accessory dwelling units (ADUs) and tiny homes, due to unsustainable prices and mortgage rates. With policies being ever more accommodating of these solutions, they can be a viable investment using low-capital creative financing techniques like house hacking.
- The Rise of Neighboring Markets: The cooldown of housing in California can mean that neighboring markets will eventually start to heat up, as the demand for housing and investment properties shifts to regions with more inventory and better prices. Buying into the emerging markets around California can provide fast ROI if property values continue to rise, making them well-suited for short-term investments with a fix-and-flip or construction loan.
Risks:
- Financing Challenges: Elevated interest rates can increase borrowing costs, affecting the overall return on investment and cash flow projections. Higher interest combined with potential further declines in property values could impact the profitability of your investment.
- New Regulatory Environment: The recent legislative actions intended to make housing more accessible in California can be advantageous to some investors, but it can also hinder others. Most of the new policies are intended to facilitate more low-income housing, which can be a disadvantage to you if that isn’t your target market.
DSCR Loans as a Tool for California Investors
The current economic outlook in the cooling California housing market can dampen various investment strategies. However, one strategy that can allow investors to thrive in this unique environment is DSCR loans.
DSCR loans focus primarily on a property’s income-generating potential rather than the borrower’s personal income. Let’s explore the biggest advantages they can offer to California investors:
Advantages of DSCR Loans:
- Property Cash Flow Focus: By emphasizing the property’s ability to generate income, DSCR loans provide an alternate pathway for investors whose personal income may not meet conventional lending criteria.
- Simplified Approval Process: Without needing to conduct thorough income checks, borrowers enjoy an accelerated approval process. This can enable them to swiftly seize opportunities in a competitive market.
- No Effect on Personal Credit or DTI: Since DSCR loans are based on the property’s financial performance, they do not count towards your personal credit score or debt-to-income (DTI) ratio as long as you borrow under an LLC.
- Scalability: Because DSCR loans don’t focus on personal income credentials such as DTI, they can facilitate the acquisition of multiple properties. The only real limit is lender willingness, and being able to find properties with high positive cash flow. You can essentially finance an unlimited number of purchases, enabling you to rapidly scale your portfolio.
In a cooling market, it can be difficult to turn a profit with a fix-and-flip. And although low prices can be advantageous for those looking to buy and hold properties long-term, it may take a while for appreciation to pick back up.
DSCR loans provide a viable investment strategy in these times, enabling investors to earn consistent rental income through periods of market uncertainty. With the option to rapidly scale your portfolio, you can end up with a collection of highly desirable rental properties. This sets you up for significant gains once markets normalize again, should you decide to sell.
California Housing Market FAQ
Is California’s housing market expected to crash in 2025?
Most experts agree that a full market crash is unlikely. Instead, the signs point to a cooling trend. While home prices in some regions, like San Francisco, have declined significantly, and sales volumes remain below historical averages, neighboring markets are being revitalized by the influx of people migrating away from expensive and risk-prone regions. This suggests a slower but relatively stable market rather than a dramatic collapse.
What are the best regions to invest in during a cooling market?
The best regions to invest in depend largely on your wider investment strategy. If you’re looking to earn long-term rental income, it would be best to invest in an area that is experiencing or about to experience a boom in rental demand. If you want to hold long-term, markets poised for eventual growth, such as Sacramento, San Diego and the Inland Empire, may serve you better.
States experiencing a continued population boom, such as Georgia and Texas, are also worth looking into while California’s market is cooling down. Experts expect both states to see increases in home sales and price growth thanks to inter-state migration, plentiful jobs, and affordable rent and home prices, among other factors.
How can investors use DSCR loans in California?
Once pre-approved by a DSCR lender like Defy, investors can use DSCR loans to purchase rental properties in areas that are likely to experience a rental income boom for the best yields. Cities in the path of evacuees from the LA fires are among these areas.
What factors indicate that California’s market is cooling?
Key indicators include longer days on the market, price stabilization or declines in some regions, and increasing housing inventory. External factors like rising interest rates and insurance providers leaving the state can also indicate that housing demand will drop.
Is it a good time to buy property in California in 2025?
The cooling market may present opportunities for long-term buyers to negotiate better prices. However, financing costs remain high due to elevated mortgage rates. Those looking to earn long-term rental income can benefit from the rise in rental income in many regions as the exodus from Los Angeles continues. On the other hand, those who intend to make short-term gains by flipping houses may run into difficulties, from prohibitive purchase costs in the rapidly growing areas in Southern California, stagnating prices in Northern California, and low buyer confidence throughout the state.
How will the tech industry’s performance impact California’s housing market?
California’s housing market is closely tied to the tech industry. If major layoffs continue or companies relocate to lower-cost states, demand in tech-heavy regions like Silicon Valley could soften. This could have a ripple effect on markets around tech centers and in neighboring states, as those who can no longer afford to live in their current place of residence seek other arrangements.
Key Takeaway
While most signs in the California housing market point to a general trend of cooling down, it’s important to note that many real estate market trends are often regional. At times, even adjacent zip codes can be vastly different in terms of market temperature. Right now, demand seems to be shifting away from historically expensive locales and into markets that are more reasonably priced and less exposed to environmental risks.
With housing likely to remain inaccessible to many in the near future, rental income potential is expected to rise. This positions DSCR loans as a great tool to tap into that potential. Even if your end goal is to hold and sell, focusing on rentals for the time being lets your investment work for you while you wait for prices to return to normal levels.
Need help figuring out your next move in the California real estate market? Defy has got your back. Schedule a consultation with us on our website, and let’s plan out your winning strategy. Alternatively, you can call us at (615) 622-1032.
