Property prices: What goes up…

Boom-time markets, flush with cash and rising real estate prices, become untethered from historical price trends. During these short-lived virtuous cycles, sellers and seller’s agents dominate real estate transactions.

But upward momentum can’t last forever.

Eventually, home sales volume evaporates and prices dip. The boom slips into a bust, a process known as the vicious cycle.

As we gather perspective from the past and weigh today’s market factors of rising interest rates and retreating sales volume, we can make a forecast for the coming years of California’s real estate market.

The chart below displays home price movement (the blue line) alongside the mean price trendline, the historical equilibrium to which home prices cyclically return (the smooth black line). The mean price trendline reflects a home’s long-term value, as influenced by homebuyer incomes.

Make your best guess by clicking on the orange dot in the chart below and dragging the line to which direction you believe home prices will head in the future. When you are finished, click Reveal graph to compare your forecast with firsttuesday’s forecast.

Today’s wide disparity between the mean price trendline and actual price movement means fewer homebuyers are able to qualify due to prices rising significantly faster than incomes.

Record-low interest rates temporarily relieved this homebuyer purchasing power crunch in 2020-2021. However, when interest rates began to leap from their historic lows, the support for home prices rapidly disappeared. Without fuel from low interest rates and homebuyer demand, California home prices peaked in May 2022.

Watch for prices to continue to fall back in the months ahead, absent the possibility of a slight seasonal bounce during spring 2023. Home prices will slump below 2019 pre-recession levels by 2024, not expected to find a bottom until around 2025.

Then, prices will gradually rise as we cycle from recession into recovery. The return of real estate speculators and long-term buy-to-let investors by 2026 will help jumpstart the housing market before buyer-occupants feel confident enough to return in large numbers.

For more information on monthly price movement in your region, read more about California’s home price trends.