California Real Estate Forecast for 2016: Gradual Price Gains Ahead?

Earlier this summer, the California Association of Realtors (CAR) issued a forecast and outlook for the California real estate market in 2016. The Realtor group expects home prices to continue rising through the end of this year and into next.

With that being said, house values could rise at a more moderate pace next year, compared to the gains we’ve seen over the last couple of years.

CAR’s predictions for the California housing market mirror the broader forecasts being issued by economists and analysts across the country. The general consensus among housing experts is that home prices in the U.S. will continue rising in 2016, but at a slower pace than 2015. We’ve covered this before.

California Real Estate Prediction for 2016: Smaller Home-Price Gains Ahead?

Getting back to the California real estate forecast, CAR expects house values in the Golden State to continue rising next year. Home prices will likely “grow steadily this year and next [2016],” the Realtor group said recently.

But next year’s gains could be smaller than what we’ve seen in recent years. To illustrate this cooling trend, let’s look at the median selling price for California homes over the last few years.

  • In 2013, the median selling price for single-family homes (let’s call it “median SFH”) rose to $407,200. That was a whopping 27% increase over the previous year.
  • In 2014, the median SFH value rose again to $447,000, but this time the year-over-year gain was 9.8%. Still a big gain, but slowing nonetheless.
  • In 2015, CAR projects that the median SFH price will be $470,600 for the year. That’s an increase of 5.3% over 2014. Annual appreciation slows again.
  • CAR’s California real estate forecast for 2016 predicts an additional 4.4% rise in home prices, with the median SFH value climbing to about $491,300 by year’s end.

This doesn’t mean the California housing market is becoming “sluggish.” Far from it. Housing demand is still high in most metro areas across the state. It merely suggests a return to normalcy.

The double-digit price increases of 2013 and 2014 were anomalies resulting from the housing collapse of a few years earlier. Home prices had a long way to climb in those days, so they rose quickly (especially as the economy recovered). Annual gains of 4% to 5% are more normal and sustainable.

Market ‘Temperature’ Varies from One City to the Next

These are statewide predictions for the California real estate market in 2016. Some cities and metro areas could see much bigger gains next year, compared to the statewide forecast above. If I were a betting man, I’d say home prices in San Francisco will rise more than 4.4% in 2016.

On the other hand, some real estate markets across California are already reaching pre-recession peak levels. The year-over-year price gains have slowed considerably in these areas, even more than the statewide cooling trend shown in the bullet points above.

The Threat of Rising Prices, Mortgage Rates

While mortgage rates have risen slightly since the start of this year, they are still low by historic standards. The average rate for a 30-year fixed mortgage has been hovering around 4% for many weeks. This has brought more buyers into the market, boosting demand for housing and driving real estate prices north across California.

The general consensus among mortgage and housing analysts is that long-term mortgage rates will likely rise in 2016. These predictions are based on several factors, including economic improvements, increased demand for housing (and mortgage loans), and the likelihood that the Federal Reserve will raise the federal funds rate later this year.

If home loan rates do begin to rise in 2016, it will likely reduce real estate sales volume and thereby soften demand. But that’s a lot of “if” statements.

The bottom line: Most California real estate market predictions for 2016 call for continued, but more modest, home-price gains. Low mortgage rates should continue to lure buyers into the market between now and the end of this year. But a gradual rise in interest rates and home prices (which is what many have predicted) could price some buyers out of the market. So, while there is room for continued growth in most housing markets across California, we probably shouldn’t expect the kinds of gains seen over the last couple of years.

Disclaimers: This story contains a forecast and outlook for the California housing market in 2016. Such statements are the equivalent of an educated guess and should not be viewed as financial advice or guidance. The publishers of this website make no claims, assertions or guarantees about future real estate trends. Third-party data are deemed reliable but not guaranteed.