California Housing Market Faces Deepening Slump as Sales Hit 17-Month Low

The California housing market is showing signs of a significant slowdown, with home sales plunging to their lowest level in 17 months. According to data from the California Association of Realtors (CAR), May 2025 saw 254,190 single-family homes sold, marking a 4% year-over-year decline-the largest drop since December 2023. This persistent downturn, coupled with a 37% drop from the pandemic peak and a 25% decline from the long-term average, has sparked concerns about a potential "homebuyer strike" that could reshape the state's real estate landscape.

Nick Gerli, a housing market analyst and founder of Reventure, highlighted the troubling trend in a series of posts on X earlier this year. "This sizable decline in homebuyer demand is supported by CAR data, which shows sales volumes from the last three years are near the lowest on record since 2005," Gerli wrote. The data aligns with recent reports from Mortgage Professional, which noted that July 2025 marked the 34th consecutive month of statewide home sales falling below the 300,000-unit benchmark, with year-to-date sales dipping 0.4%-the first negative growth in six months.

Rising Inventory and Falling Prices

The slowdown is not isolated to sales volume. Inventory levels are surging, with a 50.5% year-over-year increase through May 2025, the fourth-largest rise among U.S. states, according to Reventure's analysis. This glut of unsold homes, combined with muted buyer activity, is putting downward pressure on prices. Zillow data indicates a 0.50% month-over-month drop in home values from April to May 2025, marking the fourth consecutive monthly decline. While year-over-year values remain slightly up by 0.2%, analysts warn that this metric could turn negative in the coming months if current trends persist.

Home sales in California are down 37% from their pandemic peak.

The statewide median home price has also softened, falling to $884,050 in July 2025-a 1.7% drop from June and 0.3% below July 2024 levels, according to CAR. This marks a five-month low, reflecting what CAR President Heather Ozur described as "buyer caution" amid economic uncertainty. Jordan Levine, CAR's senior vice president and chief economist, added, "With housing inventory plateauing and the sales-price-to-list ratio hitting a near 30-month low, the market appears to be cooling off slightly."

Affordability Crisis Looms Large

Despite the price corrections, California's housing market remains prohibitively expensive. Reventure data reveals that the median household must allocate over 62% of its gross income-approximately $237,000 annually, per the Legislative Analyst's Office (LAO)-to afford mortgage and tax payments on a typical home valued at $787,000. In Southern California, the average home exceeds $1 million, while Bay Area properties top $1.5 million. This affordability gap, exacerbated by mortgage rates that surged from 3% pre-2022 to nearly 7% by October 2022 and remain elevated, has priced out most renters and first-time buyers.

The LAO's latest Housing Affordability Tracker (2nd Quarter 2025) notes that monthly costs for a newly purchased home have risen by $2,700 since 2020, driven by both price increases and higher interest rates. This has led to a "unique challenge" in the market, limiting the pool of eligible buyers and contributing to the current inventory buildup.

Regional Implications and Migration Shifts

The struggles in California's housing market could have a ripple effect across the Western U.S. Historically, negative domestic migration-peaking at a net loss of over 300,000 residents in 2006-has driven demand to neighboring states like Arizona, Nevada, and Utah. However, Reventure's analysis of migration data from 1991 to 2024 suggests a potential reversal. As home values dip, fewer Californians may leave the state, reducing the outflow of buyers to these regions. "We could be on the doorstep of another cycle where fewer people leave California, pulling demand back into the state if affordability improves," Gerli noted.

This shift could challenge the narrative of a one-way exodus, with states like Texas-long a beneficiary of California out-migration-facing reduced pressure. A firsttuesday Journal report from 2019 underscored how high living costs, including home prices and taxes, have fueled this trend, but a cooling market might stabilize migration patterns.

Looking Ahead: A Market in Transition

Experts are divided on the outlook. Norada Real Estate forecasts a 10.5% increase in single-family home sales for 2025, reaching 304,400 units, buoyed by declining mortgage rates-recently hitting their lowest levels since October 2024-and a modest inventory uptick (the Unsold Inventory Index rose to 3.7 months in July from 2.9 a year ago). However, this optimism is tempered by California's chronic housing undersupply and the risk of a broader recession, which could lead to underwater mortgages if prices continue to fall, as warned by firsttuesday.

Gerli urges close monitoring over the next 6-12 months. "If inventory continues to rise, home sales stay muted, and values go negative, it could signal a massive shift in Western U.S. housing dynamics, ushering in an era of lower prices and more affordability," he said. For now, the market remains at a crossroads, with affordability and economic stability holding the key to its future trajectory.

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