From the summer of 2020 to the spring of 2022, California home prices rose at a pace not seen since the mid-2000s housing boom. While several factors contributed to booming home prices, a primary driver was historically low interest rates. As a result of monetary policy interventions by the Federal Reserve (Fed), 30 year mortgage rates averaged 3 percent across 2020 and 2021, 25 percent lower than the average of the prior five years (4 percent). These historically low mortgage rates contributed to rising demand to buy homes which, in turn, pushed up prices.
In 2022, however, the Fed—facing rising inflation—reversed its course and mortgage rates have increased substantially. Over the last few months, 30 year mortgage rates have bounced around between 5 percent and 6 percent. This has led to a rapid cooling of housing markets across California. After peaking in the spring of 2022, home sale prices in several major markets in California have seen double digit declines. Bay Area markets have been particularly impacted.
Illustrative of the sudden decline in housing demand, home sales have declined significantly. As of mid-August, pending home sales in many major markets were down by around one-third compared to a year ago.
While it is difficult to say where housing markets will head next, a return to the trends of the last two years is very unlikely. The Fed has signaled a resolve to maintain its recent shift to more restrictive monetary policy for the foreseeable future. As a result, mortgage rates are likely to remain elevated and housing markets more subdued.