January 2025 - San Diego Real Estate Market Update
After the annual holiday lull, the real estate market is firing back up for its 2025 year. In San Diego, we’re seeing increased new listings, more buyer activity than the last two Januarys, and a general attitude that people are tired of waiting for interest rates to come down to move. Read on for more details about how the market is performing and where we’re headed…
Mortgage Interest Rates
Mortgage rates have fluctuated slightly since our last market report in December, but since mid-October, they’ve generally hovered around the 7% mark. The market has deemed rates above 6.75% high, and the more they move off of that mark, the slower homebuyer activity is. The closer rates move to 6%, the more homebuyer activity spikes.
Home Prices
The median home price for all property types in San Diego County is starting off the year at $855,000, which is 6.2% higher than the same time last year but just under 7% lower than its peak of $918,900 in June 2024. Home prices almost always rise from January into the spring and summer, and this year will likely see the same. The question is, will the 2025 price peak show growth year-over-year? That question hinges on the complicated factors that lead to mortgage rate fluctuations and consumer spending power, which will drive housing affordability and demand. Trump has issued an executive order instructing all relevant government departments to do whatever possible to improve consumer and housing affordability, but that directive faces many challenges, so any impact is very much up in the air.
Demand for Homes
High rates have been responsible for stalling the market for going on three years as homeowners who would like to move have been hesitant to give up their existing low rates on their current homes, and first-time homebuyers have grappled with affordability. As a result, we’ve seen record-low market activity, but the pent-up homebuyer demand is enormous. And, while the affordability index is nowhere near its 2021 highs, there has been improvement as wages have risen, and it seems that people can’t continue to wait. Out of the gate in the new year, there has been more mortgage application activity, and in San Diego, we’re seeing increased movement in the market as more homeowners list their properties for sale and more properties go under contract.
Real Estate Inventory
While the inventory of homes for sale remains low by historical standards, it trended higher in 2024 than in 2023 and is headed in that direction for 2025, as well. This past November is the first time since the summer of 2019 that inventory of homes for sale surpassed the lowest inventory levels of the previous 15 years in San Diego. Inventory predictably dipped significantly in December, but we have seen most of that inventory return in January. There are two ways to look at inventory of homes for sale – raw numbers, as discussed above, and months of inventory, which takes demand into consideration. Months of inventory measures available supply against demand and is expressed in the number of months it would take to sell all existing inventory if demand remained unchanged. Months of inventory is normalizing faster than the raw count of available listings, because as inventory is rising, demand remains constricted.
Sales Activity
When mortgage rates spiked in the spring of 2022, home sales activity fell off a cliff, and it has not recovered yet. Despite the record-low inventory of homes for sale in 2020 and 2021, we saw sales activity numbers which were higher than at any time since before the Great Recession. That dynamic caused values to skyrocket, and when inflation was unsustainable, the Fed dampened demand by jacking up interest rates. Now, affordability is restricting sales activity so profoundly that the last two years were the lowest for sales volume in 3 decades. On an annual basis, 2025 is expected to see more sales activity than the previous two years, but until home prices come down (which will only happen as a result of oversupply) or interest rates come down below 6.5% sustainably, sales activity will remain constricted compared to the years prior to 2022.
Economic Outlook
Until worrying economic data, which reflects that consumers are struggling, arises, interest rates have no reason to decrease significantly. So long as the American consumer is strong, we will continue to see adequate demand for goods and services as well as property to support the existing pricing with only small fluctuations in either direction. This means that affordability can come from only two places - rising wages, which can be inflationary, or recession conditions.
Fortunately, the housing market is much better shielded from the impacts of a potential recession as homeowners enjoy immense equity on average, mortgages were restructured to be much safer in the wake of the 2008 financial crisis, and inventory is currently so low that any massive oversupply is unlikely. This is not to say that prices could not reset and that could not cause a loss of personal wealth for homeowners, but only that it would be unlikely to be catastrophic on the scale of the great recession from a real estate perspective.
Ultimately, real estate is a solid investment in the long term and looks relatively safe in the short term… but it’s not just an investment. Housing is a need, and people have been delaying their needs as it relates to housing for nearly three years. This year, people are going to assemble a plan and jump at opportunities to finally make their moves happen – we’re already seeing this play out.
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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