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 (as has happened in 2022), 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 leaping 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.

California Home price movement forecast: Year 2000=100

Price Index 0 50 100 150 200 250 300 350 400 450 500 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 Drag

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, now that interest rates have fully risen their historic lows, the support for home prices has disappeared. Without fuel from low interest rates and absent the support of a full jobs recovery, home values will decline. This downward plunge began in July 2022, with prices taking a dive across all price tiers in California’s major metros.

firsttuesday expects prices to find a bottom around 2025, when they will reach the mean price trendline. This timeline will be complicated by global events and any further (unlikely) government stimulus which may occur during the as-yet undeclared economic recession. Still, the downward pull represented by the mean price trendline means all price tiers need to drop — it’s simply a matter of when.

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