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Will Housing Prices in California Drop in 2023?

Increasing interest rates, inflation, a potential recession, and other factors are at play with the housing market. California’s unique market isn’t immune to the ups and downs of the overall housing market. In many ways, it’s more susceptible to market extremes than other states and regions.

The market shift includes a forecasted drop in existing single-family home sales, a predicted decline in median home prices, and a drop in overall housing affordability. Find out what Teak Master expects about the 2023 housing market and the data trends behind those predictions.

Where Will California’s Home Prices Go in 2023?

A miniature of a house next to a pile of coins, representing the housing market

Image by Anton Matyukha free to use under the Vista Create license

We anticipate price declines in 2023 after increases that are projected for 2022. The California Association of Realtors (CAR) forecasts the median home price for 2023 will fall 8.8% to $758,600 in 2023. Home prices increased in 2022 to a median of $831,460 from the 2021 median of $786,700. The marketplace is less competitive as it cools due to many factors, including mortgage interest rates and inflationary pressure that reduces buying power.

Where Will California’s Home Sales Go in 2023?

We anticipate sales declines in 2022 and 2023, with the fall from 2021 highs continuing. High mortgage interest rates and a looming potential recession are putting a damper on home buying and sale prices. For 2023, the CAR forecasts a 7.2% decline in sales of existing single-family homes. It projects 333,450 existing single-family homes to sell, down from the projected 359,220 in 2022. This figure is significantly lower than the boom year of 2021, when sales were 444,520, 19.2% higher than the projection for 2022.

Mortgage Rates Are a Leading Factor

Mortgage rates have a high level of influence on the real estate market. Lower rates, like the ones in the 3% range we had a couple of years ago, increased buying power and boosted demand and prices. The recent spike in mortgage rates reduced consumer buying power and is placing downward pressure on real estate prices, especially those in more expensive markets. While mortgage interest rates are one of several critical factors in the housing market, rates have become a prominent consideration as they reach rates not seen since the early 2000s.

Predicting mortgage rate changes is tricky due to multiple factors. Because the Fed presumably will continue to raise interest rates, mortgage rates are expected to stay high.

Mortgage rates, like the real estate market in general, are influenced by several factors. Rates are rising due to such influences as:

  • Inflation that persists over an extended period.
  • Interest rate hikes by the Fed, which are anticipated to continue in 2023.
  • The war in Ukraine and the global uncertainty it causes.
  • Market volatility in domestic and foreign stock markets.
  • A potential recession and economic uncertainty.
  • Supply chain issues and labor shortages, which are persisting.
  • Demand for mortgages, with low demand temporarily pushing down rates.

Mortgage rates in 2023 for standard 30-year mortgages could fall into the 5% to 9% range, likely landing near 7%. Similarly, 15-year mortgage rates are anticipated to be in the 4.5% to 8% range, likely near 6%. While mortgage rates can go up and down as demand varies, high-interest rates from the Fed coupled with inflation will probably keep rates high. Untamed inflation and geopolitical instability could drive rates to the higher end of the predicted levels.

The CAR predicts 30-year mortgages will remain high at 6.6% in 2023, up from 5.2% in 2022 and 3.0% in 2021. Historically, the rates are low, given that rates around 6% were commonplace in the early 2000s. Mortgage rates are expected to ease once inflation eases, unemployment rates reach market averages, and consumer spending is at a more realistic rate. While uncertainty raises mortgage rates, it lowers stock, bond, and equity markets.

What Are the Factors at Play?

Current market data, including changes over time, can help predict future trends. Mortgage rate increases, economic factors, and demographics all play a part. Many forecast a mild recession in the first half of 2023, including the CAR. The housing market is recalibrating, as more homes stay on the market and sellers reset their price expectations, sometimes reluctantly.

The National Association of Realtors forecasts 2022 sales will be 15% lower than in 2021 and decline another 7% in 2023. Prices are predicted to slip in markets like California, rise in some markets, and remain flat in others. The association expects California to be a prime location for drops in real estate prices, especially in expensive areas.

Why Is California a Prime Target for Market Volatility?

California and other high-cost markets are more susceptible to such influences as rising mortgage interest rates and other pressures that can drive sales and prices down. Higher prices mean lower affordability and fewer potential home buyers in the marketplace. People become priced out of their budgets more easily.

In the third quarter of 2022, CAR reported that 18% of California households could afford the median-priced home at that time of $829,760. That was up slightly from 16% in the second quarter of 2022. For the median home, a minimum qualifying annual income of $192,800 is needed to make the monthly payments, which would be $4,820, including principal, interest, and taxes based on a 30-year fixed rate of 5.72%.

Nationwide, affordability declined, with 39% of households able to afford a median-priced home of $398,500, which required an income of $92,400 to make payments of $2,310. Affordability was 50% a year prior. According to the National Association of Realtors, housing affordability has been at its lowest level since 2006.

Regardless of market volatility, a crucial part of home buying is ensuring you can afford the payments and are comfortable with the price and other terms. Irrespective of the market, well-priced homes attractive to potential buyers should do well. It’s hard to time the market and interest rates, but be prepared to stay in your home for a few years, refinancing if interest rates become more favorable.

If you’re looking to enter the housing market in 2023 with a home featuring wood decking, doors, or garage doors that could use restoration or replacement, keep Teak Masters in mind. Our experts can help increase the value of your home purchase by bringing the wood back to life. Contact us at 888-972-9568, or complete our secure online form to get started.

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