Here’s Why California Home Prices Are Rising Again in 2023

After falling through the second half of 2022, home prices in California have started rising again.

House values can be influenced by many different factors, but they’re mostly driven by supply and demand. And the main reason why California home prices are rising again in 2023 can be summed up in a single sentence:

There aren’t nearly enough properties on the market to satisfy the demand from buyers, and that’s putting upward pressure on prices.

If the current supply-and-demand situation persists, as expected, home prices in California could continue rising through the end of 2023 and into 2024. But we’ll probably see moderate gains that are more in line with historic norms, rather than the skyrocketing prices of the pandemic days.

California Home Prices Are Rising in 2023

According to the latest data from Zillow, the median home value for the state of California is currently around $743,000. That’s a bit lower than the peak of $777,000 reached in June 2022.

Home prices in the Golden State declined during the second half of last year, as they did in most other parts of the United States. This was part of a nationwide real estate slowdown brought on by rising mortgage rates and other factors.

But over the past three months or so, California’s median house price has been on the rise again. Home buyers should pay close attention to these trends, since they affect everything from affordability to competition levels.

According to a July 2023 report from the state’s Realtor association:

“California’s median home price exceeded $800,000 in June for the third straight month, edging up 0.3 percent from May’s $836,110 to $838,260 in June. The statewide median price continued to rise and reached the highest level in ten months.”

The median price points reported by these two organizations differ because they use different methods of calculation. But in both cases, the trend is the same. Both Zillow and the California Association of Realtors report that home prices are rising again in 2023.

The Main Reason: A Lack of Inventory

According to the latest mortgage industry survey conducted by Freddie Mac, 30-year mortgage rates are currently averaging around 6.9%. A year ago, the average rate for a 30-year fixed mortgage loan was 4.99%, and a year before that it was at 2.77%.

The point being, mortgage rates have risen significantly over the past couple of years. Normally, this kind of trend would lead to a reduction in buyer demand, and possibly even a decline in home prices.

But this time around, only one of those results has occurred. Higher mortgage rates have clearly reduced demand among buyers, but they’ve also indirectly put upward pressure on prices.

How did this happen? It has to do with something known as the mortgage rate lock-in effect.

In late 2022, when mortgage rates had just finished a sharp 12-month climb, the credit reporting bureau Experian published an article with the following explanation:

“The lock-in effect reflects how high mortgage rates disincentivize current homeowners from selling their home since many would prefer to avoid a more expensive mortgage on a new home. The lock-in effect restricts housing supply and may price prospective homebuyers out of the market by contributing to increased costs for the homes that are put on the market.”

Granted, there are other factors that have contributed to the current supply shortage in California. The construction industry has been under-building for many years, due to a wide range of factors including labor shortages. But higher mortgage rates have certainly played a role here as well.

This is arguably the number-one reason why home prices in California are rising in 2023, and why they could keep climbing into 2024 as well.

Researchers from Freddie Mac cited this as a contributing factor, when reporting the results of their latest mortgage rate survey. According to an August 3rd statement on the company’s website:

“Despite higher rates and lower purchase demand, home prices have increased due to very low unsold inventory.”

House Values Could Continue Climbing Into 2024

When it comes to home prices, the California real estate market seems to have adjusted to a new normal. Prices skyrocketed during the pandemic, due to a sharp increase in home-buying activity statewide. Then they declined in 2022, as the red-hot real estate market finally cooled down.

Now, prices are starting to inch upward again at a more moderate pace.

So how might this play out over the coming months? What’s the home-price outlook for California through this year and into 2024?

It’s difficult, if not impossible, to predict future real estate market trends with complete accuracy. But many housing analysts expect the current inventory situation to continue at least for the foreseeable future.

In a press release published earlier this month, Fannie Mae’s chief economist Doug Duncan said:

“We began discussing our expectations of a supply shortage in late 2014, and it remains front and center in the housing market in 2023. The supply of existing homes is near the 2009 crisis low, and it’s showing no signs of easing.”

Because of this, it seems likely that home prices in California will keep rising through this year and into 2024.

It’s also worth mentioning that residential real estate in California tends to hold its value well over the long term, despite some occasional dips. Over the past 50 years, house values in the Golden State have really only experienced two significant downturns. One occurred during the Great Recession of 2008, and the other during the past 12 months or so.

Aside from those two occurrences, brought on by extreme conditions, home prices in California tend to rise steadily over time due to strong demand from buyers.