May 2025 - San Diego Real Estate Market Update

May 21

The economic vibe shift from April to May has been a whirlwind, from the threat of tariffs tanking the stock market and causing recession fears to peak, to trade deals offering relief and stocks making a full recovery. Recession odds are low at the moment, but is that a good thing for the real estate market? Read on to find out…

Mortgage Interest Rates

The current status of mortgage rates is an interesting quandary. Because rates are so much higher than they’ve been for the previous two decades, homebuyer demand is stifled due to affordability challenges. However, inventory is also so far below the pre-pandemic “normal” that the stifled demand is just right to create a balanced market where homebuyer competition has tamed and home prices have leveled off. This dynamic, in part, has helped inflation come under control. The problem is, people can’t afford new mortgages, so the market has slowed to the lowest level in decades for two years and counting. Yet, if rates are lowered substantially without inventory levels increasing (more on the likelihood of that later), we will see the surge in demand push home prices up, quickly erasing the improved affordability from lower rates, and potentially stoking inflation again. The Fed is facing a conflict in its dual mandate to support the labor market and keep inflation under control. To prevent swings in either direction, we will probably see a very slow inching down of rates, meaning that unless something wild happens with the economy and long-term bond yields, substantial mortgage rate relief may be a ways off.

Demand for Homes

Thus far in 2025, demand for homes has been roughly on par with 2023 and 2024, which is to say, very low. Transaction volume is forecasted to be flat, while the previous two years were the weakest for sales volume in over 30 years. This is primarily a function of mortgage rates, while homeowners are wearing the golden handcuffs of sub-4% rates on their existing homes, and wages have not kept pace with housing affordability for would-be homebuyers. If rates fell below 6% (a big if), and the economy was in good shape, we would likely see a rise in both inventory and demand; until then, the story will likely remain the same.

Real Estate Inventory

The current inventory of homes for sale in San Diego County reached a level in April not seen since briefly in 2021. If inventory stays level or rises, we will see the highest inventory environment since before the pandemic-induced 2020-2022 real estate frenzy, but this isn’t saying much. Inventory is expected to rise through the summer as new listings rise month-over-month while pending home sales fail to absorb the new inventory, and we head into a time of year where transaction volume tends to diminish. But inventory would have to double to reach pre-2020 norms, and the likelihood of that happening is pretty much zilch. Low inventory is a systemic issue caused by a rising population, unsustainable building codes, a lack of buildable land, changing demographics, and more. When and if homebuyer demand returns to normal levels, low inventory and subsequent rising prices will take front and center as the most pressing issue facing the real estate market.

Home Prices

Currently, home prices are slightly lower YoY and level MoM, but there is a shadow statistic that isn’t being talked about that reflects that home sellers are netting less than is being reflected in the prevailing data. In a recent Redfin report, it was revealed that in San Diego County, 61% of sellers offered their buyers concessions such as money towards closing costs or rate buydowns, costs that are necessary to compete with other home listings for today’s weary homebuyers, which impact the sellers’ net proceeds, but are not reflected in home pricing data. In markets like Texas and Florida, where demand has been weaker for longer, those concessions have driven actual home prices lower, bringing home prices and homebuyer expectations closer in line, and minimizing the incidence of concessions on more recent home sales, a trend we’ll be watching for locally.

As for now, the stage is set for level home prices, with small fluctuations in either direction, until and unless we see a major shift in the current economic fundamentals – the chances of which are certainly not slim, given our current administration's propensity for unpredictable and impactful moves. In the absence of a major shift, the current trajectory continues, and ideally, we will see prices remain level or decrease slightly, while mortgage rates slowly fall and wages slowly rise, creating a recipe for improved housing affordability that evolves slowly enough to be sustainable for the longer term.

Sales Activity

Pending sales fell in April at a time when the market would typically be heating up, likely due to the stock market turmoil caused by the rollout of a tariff plan that has since been modified, and that markets have now recovered from. Sales data follows pending data by about a month due to the length of an average home sale transaction, so we will likely see lower sales in May, but also see pending sales, and June’s closed sales, recover to March’s levels or higher. In the past two years, sales have begun to fall beginning in June, and without lower rates, which would be a longshot, we will probably see a similar trend this summer.

Market Outlook

At this time last month, recession alarm bells were ringing, and the mood on the economy was pretty sour. Today, the mood is much more optimistic because of trade deals and tariff pauses, and recession odds are greatly diminished. This is both good news and bad news for the real estate market. On one hand, no recession (hopefully) means sustained strong employment, i.e., more people who feel confident in their paychecks (should) mean more homes purchased. On the other hand, nearly full employment over the last two and a half years has not translated to strong home sales due to high mortgage rates and home prices. Without an economic downturn, the chances of a big swing towards lower rates are unlikely. Right now, there’s no sign of a shake-up, and without that shake-up, we’re in store for more of the same – high home prices, high mortgage rates, and low home sales volume as fewer buyers and sellers come to the table.

Regardless of recession risks, the risk of a housing market crash is extremely low. Mortgage delinquencies and debt-to-income ratios among Americans are historically low, and without distressed sellers, home prices don’t crash. Are we looking at home price declines in the near future? Probably, but they will be slow declines, and if we see favorable rates emerge, price depreciation will be erased.

With all of that said, for the motivated sellers and creative homebuyers who do come to the table, there is plenty of opportunity for great deals to be made in this market.

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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