The real estate industry is preparing to turn a new page after a challenging 2024, and one of the first forecasts for the housing market in California is showing a brighter outlook for 2025.

In its annual report, the California Association of Realtors (C.A.R.) predicts that home sales in the state will increase by 10.5% compared to projections for 2024 and rise by 6.8% from 2023.

While the total national home sales are expected to be around 3.86 million units in 2024, California is predicted to reach approximately 275,400 transactions. The forecast for 2025 is 304,400 transactions.

The total number of home sales this year is still significantly lower than three years ago, when the figure reached 444,500.

Prices continue to rise:

With increasing home sales, the Association believes that home prices in California will continue to climb. The forecast for 2025 is a 4.6% increase, reaching an average price of $909,400. The average price is expected to be $869,500 in 2024 and $814,000 in 2023.

California continues to be out of sync with the rest of the U.S., as the ongoing housing shortage continues to push prices much higher than the national average of $416,700 in August.

Housing supply is expected to improve by about 10% as interest rates trend downward, but accumulated demand will still drive prices higher, according to Jordan Levine, the Chief Economist of C.A.R.

“Prices are expected to rise more slowly, but the housing shortage will keep the market competitive, barring any major economic shocks, so prices will continue to increase,” Levine said.

The impact of interest rates

As Californians spend a significant amount on housing, any changes in mortgage rates impact monthly payments and can help improve affordability even as prices remain high.

A recent report from Redfin indicates that the typical monthly payment in San Jose has decreased by more than $2,000 from its peak in the spring, but the average is still a staggering $9,398 per month. Interest rates have dropped from about 7.2% in April to 6.1% in mid-September.

San Francisco (down $1,372 from April’s peak) and Oakland (down $1,338) ranked second and third for the largest declines in monthly payments, according to Redfin.