Forecast: California Home Prices Will Slow, But Not Drop, in 2022

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Key highlights from this housing report:

  • California home prices are expected to rise more slowly in 2022
  • But home prices in California are not expected to drop in 2022
  • That’s according to a forecast from the state’s Realtor association
  • Supply and demand imbalance is putting upward pressure on prices
  • Overall, the market is expected to remain competitive next year

Last month, the California Association of REALTORS (C.A.R.) published their housing market forecast for 2022. Among other things, the industry group offered some predictions relating to house values.

C.A.R. researchers believe that home prices in California will rise more slowly in 2022, compared to 2021. Quite a bit slower, in fact. But they do not expect to see a drop in prices any time soon.

California Home Prices Predicted to Slow Down in 2022

According to the state’s Realtor association, home-price appreciation in California will slow down considerably in 2022. That’s according to their long-range housing market forecast, published in October of 2021.

C.A.R. predicted that the median home value in California would rise by 5.2% in 2022. In 2021, the median price is projected to rise by 20.3% (by year’s end). So we’re talking about a significant reduction in annual price growth, from 2021 to 2022.

  • By the end of this year, the state’s median house value could reach $793,100.
  • By the end of 2022, the median price point is projected to reach $834,400.

(Of course, this is only a forecast for California home prices. It’s the equivalent of an educated guess. No one can predict future housing trends with complete accuracy.)

Their prediction for 5.2% home price growth in 2022 would actually be a move toward normalcy. The 20% gains seen during 2021 are highly unusual and generally not sustainable over the long term. From an economic and market stability, California could actually benefit from a slowdown in home price growth.

So we shouldn’t view this forecast as a negative assessment of the state’s housing market. On the contrary, sales activity is expected to remain steady throughout 2022.

C.A.R. is predicting that California home prices will slow down in 2022. But the market as a whole will likely remain active and competitive next year.

But Prices Are Not Expected to Drop

Given the meteoric rise in house values over the past 15 months or so, it’s only natural to wonder if California home prices will drop in 2022. But that doesn’t seem likely.

A few cities across the state could see a dip in prices during 2022 — or at least a leveling off. But in the majority of California’s local housing markets, home prices are not expected to drop in 2022.

A slowdown, on the other hand, seems likely. That’s what C.A.R. and other forecasters have predicted. The general consensus appears to be that home prices in California and nationwide will wisely more slowly in the months ahead.

Related: Will houses get any cheaper in 2022?

A few weeks ago, the real estate data company Zillow surveyed a group of housing analysts and economists about future real estate trends. Among other things, the group predicted that house values would slow down nationwide.

To quote that report:

“Experts surveyed expect home prices nationwide to increase a cumulative 31.8% through 2025, the equivalent of an average annual rate of 5.7% — far below the current annual appreciation of about 17%.”

This outlook closely matches the C.A.R. forecast for home prices in California, extending into 2022. House values are expected to slow down, but not drop, over the coming months.

A Record High for House Values in the Golden State

When measured by the statewide median or average, home prices in California are higher now than ever before.

The chart below, provided by Zillow, shows the typical house value for the state of California going back to 2012. As you can see, it has been a more-or-less upward climb since then.

California home price chart
Source: Zillow Home Value Index

You can also see how price growth accelerated during the COVID-19 health crisis. House values in California began to rise more rapidly in the summer and fall of 2020. That trend continued well into 2021.

Unfortunately, fast-rising home prices in California have turned an existing affordability problem into a full-blown crisis. According to the C.A.R. report mentioned earlier, housing affordability across the state continues to decline.

“Housing affordability is expected to drop to 23 percent next year [2022] from a projected 26 percent in 2021,” the report stated.

In a sense, the state could benefit from California home values dropping in 2022. It would prevent an existing problem (not enough affordable housing) from deteriorating even further. But if the C.A.R. and other forecasts are any indication, California home prices won’t drop in 2022.

Supply and Demand Imbalance Continues

Supply and demand are the driving forces behind these real estate trends and predictions. And in California, they can be summed up in a single sentence:

There’s plenty of housing market demand from buyers across the state, but not enough supply.

In other words, there aren’t enough homes listed for sale to meet the demand from buyers. This is arguably the top reason why house values in the state have risen so much over the past year or so. It’s also why economists and analysts don’t expect California home prices to drop in 2022.

The lopsided supply-and-demand situation is expected to continue into next year, despite a slight uptick in property listings in some cities.

According to C.A.R. Vice President and Chief Economist Jordan Levine:

“Demand for homes will continue to outstrip available supply as the economy improves, resulting in higher home prices and slightly lower sales in 2022.”

Conclusion, Summary and Disclaimers

Getting back to the question at hand: Will home prices in California drop any time soon?

Probably not.

An ongoing supply shortage, combined with steady demand from buyers, will continue to put upward pressure on house values. Over time, however, higher housing costs will shrink the pool of qualified buyers and cause a slowdown in price growth. That’s exactly what the C.A.R. forecast has predicted, a slowdown in home-value appreciation.

But all of this is speculative in nature. The truth is we don’t know for sure what home prices in California (or anywhere else) will do in 2022. So there’s the big disclaimer.

It’s also important to realize that housing market trends can vary greatly from one city to the next. Statewide, home prices in California are not expected to go down in 2022. But that outlook doesn’t necessarily apply to every city across the state. Some of the softer markets could experience a leveling of home prices next year, or even a slight decline.

But overall, house values will likely continue to climb.