February 2025 - San Diego Real Estate Market Update

The new year is well underway as it relates to the real estate market, with inventory of homes for sale climbing by about 100 homes per week. Demand, on the other hand, is still sluggish, but if the recent mortgage rate improvements stick, they may drive an upward trend. These supply and demand dynamics will drive home prices this year, and right now, the jury is out as to whether home prices will trend positive or negative. Either way, it looks like any appreciation or depreciation will be mild.

Mortgage Interest Rates

Mortgage rates have seen some improvement in the last week as economic data was seen as favorable to bond traders. All eyes are on 10-year Treasury bond yields, which mortgage rates closely correlate to. Some moves the Trump administration is making could drive bond yields down which would help mortgage rates decrease – but not likely much below 6.5%, which is still well above the 6% rates would need to fall below to really get mortgage demand heated up.

Home Prices

As expected, home prices are on the rise since their annual low in December. This is a typical seasonal cycle–home prices fall in the later part of the year and then typically rise in the first half of the year. Right now, home prices are up between 3-7% YoY, depending on your preferred metric, but are still down about 6% from their all-time peak in June of last year. As of now, homes are selling for under list price on average, but the most desirable homes still demand multiple offers and are pushing that average upward. Still, San Diegans and Americans as a whole are incredibly equity-rich, with only 1.7% of homeowners having negative equity.

Demand for Homes

Demand is the hot topic this year. The pent-up demand for homes is huge, but most homebuyers are waiting for affordability to improve -- we see this in the length of time homes are staying on the market, and how many showings each home for sale gets before it sells, amongst other more concrete metrics. Affordability has improved marginally in recent months, as both home prices and interest rates have fallen a bit. However, there is an intangible element of consumer expectations that is driving demand, as well. In the U.S., we got hooked on cheap money as a typical mortgage rate in the wake of the great recession until 2022 was somewhere in the 3-4% range, and briefly during Covid, even lower. Of course, actual affordability is an issue for many, but there’s also a perception challenge at play–today’s 7% is “too high” in people’s minds, and they want to wait to buy until rates are lower. How much lower? Demand would probably be substantially stimulated if rates fell to 6% or under. There’s no telling right now when rates might reach that low, but when they do, home prices will probably rise and erase much of the savings homebuyers were striving for by waiting for lower rates. Those are savings they could retain if they bought at lower prices and refinanced their rate when rates drop. After all, if rates fall and home prices don’t rise–well, the reasons for that would be grim, and then we’d have bigger issues than the over/under on a potential mortgage payment.

Real Estate Inventory

Inventory of homes for sale is up nearly 30% YoY, and we saw more new listings in January than we’ve seen at the beginning of any year since January 2021. This represents a welcome increase in choices and leverage for buyers, especially those paying cash. Without a big improvement in mortgage rates and homebuyer demand, this increased inventory will represent sluggish home price appreciation for homeowners. With more competition on the market, home sellers might consider enticing buyers with incentives such as rate buydowns, closing cost credits, and paid buyers’ agent commissions.

Sales Activity

We saw the bottom for closings on homes in January, which is typical, as few homes go under contract in December and closings lag behind pending sales by about a month. About 350 more homes went under contract in January vs. December, which is still over 500 homes shy of 2024’s peak in May. 2023 and 2024 were extremely slow years for home sales–the lowest in over three decades. This January saw fewer homes go pending than in January of the previous two low-activity years. Let's hope this isn’t indicative of a trend of even slower sales this year. We have seen early indications of an increase in buyer and seller interest for 2025, but that interest has not turned into hard statistics, yet.

Economic Outlook

The overall economy is at an inflection point, with factors too numerous to predict yet which way things will go. Inflation, consumer confidence, employment, wages, credit, government spending and more are all question marks at the current moment. Your perspective about which way the economy is headed might be tied to your political leanings, but for now it’s safe to say that we simply don’t have enough information to proceed with an assumption other than the continued status quo of prices that feel high, rates that feel high, and an economy that is surprisingly resilient, but feelings the pain of a challenging few years.

Most importantly, if you have questions or concerns about your specific situation… CALL ME to help sort through them. That’s why we get up in the morning - not just to sell homes, but to serve our clients.

As always, we will be here to continue to provide you with updates about the housing market and answer any and all of your questions. Feel free to reach out to us anytime.

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