Will California Home Prices Drop, Level, or Keep Rising in 2023?

The California real estate market has been on a roller coaster ride for the past couple of years. We’ve seen everything from record-high price growth to record-low inventory levels.

But things have been changing during the second half of 2022. The housing market has settled down a bit. Homes are taking longer to sell, and buyers are starting to gain some much-needed bargaining power.

These changes have a lot of folks wondering the same thing. Will home prices in California drop as we head into 2023? Will they continue rising, as they did over the past couple of years? Or will they level off in some kind of “flatline” scenario?

While no one can predict future real estate trends with complete accuracy, one thing seems clear. Home-price growth in most California cities will almost certainly slow down, as we finish out this year and head into 2023.

What Will California Home Prices Do in 2023?

According to a recent housing market report from the California Association of Realtors, the statewide median sale price in California reached $839,460 in August 2022. That was a modest increase of 1.4% over a year earlier.

But when we look at the latest month-to-month data, home prices seem to be leveling off. And in some of California’s major metro areas, they’ve even dipped in recent months.

For example, the most recent Case-Shiller Home Price Index report, published last month, showed a slight month-to-month decline in the San Francisco, Los Angeles and San Diego metro areas.

But even within those metro areas, you could zoom in even further and see that prices are rising in some areas, while falling in others. As always, real estate is a local matter, and conditions can vary greatly from one city to the next.

Overall, however, home-price growth in California has slowed during the second half of 2022. Current conditions suggest that this trend could continue into 2023 as well.

Despite what prices do in the short term, they’ll likely continue to climb over the long term. As you can see in the California house price index chart shown above, home values in the Golden State tend to rise steadily over time.

Upward Pressure from Tight Inventory Conditions

Tight supply conditions within the California real estate market continue to put upward pressure on home prices.

As we’ve mentioned in numerous blog posts in the past, the housing market supply situation remains constrained. This means buyers are still competing for a limited number of properties in most cities across the state.

But while supply levels remain low from a historical standpoint, they have improved a bit over the past few months. During the summer and fall of 2022, more and more homes have been coming onto the market. This is good news for buyers, especially those who might have struggled to find a property in the past.

Whether or not home prices in California rise, dip or level off in 2023 will largely depend on supply changes going forward.

If the recent increase in inventory levels turns out to be short-lived, tight supply conditions could continue to boost prices. On the other hand, if supply levels continue to rise into 2023, it could cause a further deceleration in home-price growth.

Generally speaking, prices tend to rise faster when demand exceeds supply, while slowing down in the opposite scenario.

Downward Pressure from Higher Costs, Reduced Demand

Among the factors that could put downward pressure on California home prices over the coming months, we have higher mortgage rates and a slight decline in buyer demand.

These things go hand-in-hand. Higher mortgage rates and house values have reduced the number of qualified buyers within the real estate market. This in turn has led to slower home sales and less competition among house hunters.

The average rate for a 30-year fixed mortgage loan rose from around 3.2% at the start of this year to around 6.6% in early October. That’s based on the weekly market survey conducted by Freddie Mac. And we’ve already talked about the steep increase in home prices over the past couple of years.

Going forward, these trends could put downward pressure on home prices. But again, a lot will depend on the inventory situation and how it changes going into 2023.

That’s why it’s so hard to predict what California home prices will do in 2023. There’s a lot happening on both the supply and demand side of the equation, and that makes price forecasts more difficult — even for economists.

A More ‘Buyer-Friendly’ Real Estate Market Emerging

Several of the trends we covered above could actually benefit home buyers in California.

For example, the gradual uptick in inventory could make it easier for buyers to find a suitable property within their budget. Additionally, a reduction in buyer demand could make the house-hunting process a lot less stressful, compared to what we saw during 2021.

Despite any future ups-and-downs with home prices, the California real estate market remains a solid investment for buyers. Historically speaking, properties tend to hold their value well over the long run.

When you combine that with the buyer-friendly conditions mentioned above, it could make 2023 a very good time to buy a house in California