Real Estate Predictions for 2025

At the beginning of 2024, home prices across the U.S. were still climbing, but mortgage rates were at their highest in two decades. The high costs of buying a home and the shortage of available houses made many buyers think twice, leading to a decrease in market demand. As we near 2025, experts are cautiously optimistic that a slight drop in mortgage rates and a decrease in inflation could offer some relief. However, this relief will take time, and housing affordability will still be a significant problem in many U.S. markets going into 2025.

The Santa Cruz real estate market is anticipated to follow a similar path, but a few local elements set it apart. With its breathtaking natural beauty and closeness to Silicon Valley, this seaside location continues to draw investors and homebuyers searching for a bit of paradise. Nearby towns like Watsonville, Capitola, and Los Gatos are expected to keep attracting interest as people look for homes near job centers in a beautiful environment. Despite the high costs, the strong local demand from tech workers and retirees is likely to help Santa Cruz and its neighboring areas stay strong even as the market changes.

Current Trends in Home Prices: A Data-Driven Perspective

To get a grasp on the housing market, we need to pay attention to the recent shifts in mortgage rates. These rates really affect how affordable homes are and how many buyers are out there looking to purchase. In 2020, mortgage rates hit record lows, with the average for a 30-year fixed mortgage being about 3.38%. It was because, with all the uncertainty from the pandemic, investors flocked to safer options like government bonds, which helped push rates down. In 2022 and 2023, the Fed hiked interest rates to tackle inflation, which led to an increase in mortgage rates. By October 2022, the 30-year fixed rate hit over 7% for the first time in years. It then dipped to about 6% in early 2023, but rates continued to fluctuate throughout 2024. In May 2024, the rate peaked again at 7.39% before easing back down to the 6.5% range as the economy adjusted, partly due to job market concerns and speculation that the Fed might cut rates.

As of November 4, 2024, the 30-year fixed mortgage rate is sitting at 6.90%, which has been consistent since July. While this is higher than the low of 5.89% in September, it’s still well below last year’s peak of 8.01% in October. The 15-year fixed rate is also a bit higher now, at 6.03%, close to the high of 6.05% seen in early July. Jumbo loans (for higher-priced homes) are also up to 6.92%, which is the highest they’ve been in three months, though still lower than last fall’s 8.14%.

What does all this mean for someone thinking of buying a home in 2025? While mortgage rates are still higher than they were in 2020, they’re not as bad as last year’s highs, which suggests that, even though rates are a bit challenging right now, they could stabilize in the near future, creating potential opportunities for homebuyers who are watching the market closely. If you're planning to buy in 2025, it might be worth keeping an eye on these trends to make sure you’re timing your purchase right.

Even though the speed of price increases has slowed down, home prices are still going up at a steady rate of around 5.5% each year. A key reason for this strong demand is that many people aged 30 to 39 are becoming first-time homebuyers, often because they want to settle down and start families. This trend is especially noticeable in areas like Santa Cruz, Scotts Valley, and Soquel. These locations are near Silicon Valley, which attracts tech workers who want to live close to their jobs while enjoying a nice lifestyle, putting extra pressure on the housing market. Santa Cruz County is doing pretty well, and home prices are expected to either stay the same or rise slowly due to this ongoing interest.

6 Real Estate Predictions for 2025

The 2024 real estate season has been tough, leaving purchasers and property owners wondering what the future holds for them. So, how should real estate players expect the housing market to evolve into 2025 and beyond? Let's look at six critical predictions.

1. Mortgage Rates are Likely to Decline

The Federal Reserve's decisions on interest rates have a major influence on the housing market, affecting mortgage rates and home affordability. They've suggested they may keep lowering rates, which could trigger a drop in mortgage rates in 2025—especially if inflation slows and the job market improves.

Organizations such as Fannie Mae, the Mortgage Bankers Association, the National Association of Realtors, and Wells Fargo are all forecasting that rates will drop gradually, potentially averaging around 5.98% by the end of 2025.

Yes, mortgage rates are expected to decrease gradually as inflation slows and unemployment rises slightly, signaling a solid economy growing at a slower pace. For homebuyers eyeing Santa Cruz, Scotts Valley, Capitola, and Soquel homes for sale, these trends could lead to lower borrowing costs. Many experts think the Federal Reserve may continue to lower the Federal Funds Rate in response, and when that happens, mortgage rates follow suit, making homes more affordable.

However, it is critical to approach this with reasonable expectations. The meager mortgage rates experienced during the pandemic were unusual and are unlikely to repeat unless another major global crisis impacts the world economy. Rather than waiting for such historic lows to return, buyers in the Santa Cruz real estate market may need to act now to receive the best rates available in the present market.

If you want to get a better interest rate, work on making your financial situation stronger. Make sure to keep your credit score in good shape. Try paying your bills on time and using only a little of your available credit. Saving up for a more significant down payment can also help you get better loan conditions and lower your monthly payments. Finally, remember to compare lenders to find the best terms and rates that satisfy your needs. For those looking to buy in Santa Cruz and nearby areas, following these tips can really help you afford a home in this popular place.

2. Rising Home Prices

In 2025, the price of homes will continue to increase nationwide, but at a slower rate than in recent years. The top 10 real estate forecasting companies estimate an average growth in home prices of 2.6%, which is significantly slower than in recent years. While there are significant variances in what each group believes, most agree that the days of massive price increases every year are over. Instead, we may expect a more gradual and normal growth in property prices.

Forecasting Institution 2025 Home Price Appreciation (%) 1. Goldman Sachs 4.4 2. Wells Fargo 4.3 3. Housing and Property Economic Services 3.2 4. Fannie Mae 3.0 5. Morgan Stanley 3.0 6. Mortgage Bankers Association 2.9 7. Zelman & Associates 2.3 8. National Association of Realtors 1.9 9. Freddie Mac 0.6 10. Moody's Analytics 0.3 Average of All 10 2.6

Home prices in Santa Cruz County, however, are anticipated to climb at higher than national average rates due to a scarcity of land and a high demand for housing. Prices in most sought-after regions like Felton, San Lorenzo Valley, and Pasatiempo may rise more than the national average as purchasers seek cheap houses near major employment centers. Despite the slower growth, demand for houses in this region should keep prices from falling too much.

3. Expect More Homes to Sell

With mortgage rates becoming more affordable, the housing market is likely to see an increase in available homes and buyers ready to purchase. Fannie Mae, MBA, and NAR forecast a slight uptick in home sales for 2025, estimating that about 5.4 million homes will be sold across the country. These numbers show a slight recovery from the lower sales numbers in 2023 and 2024, where only around 4.5 million homes are expected to be sold by the end of this year.

Forecasting Agency 2025 Home Sales Forecast (in Millions) 1. National Association of Realtors 5.7 2. Mortgage Bankers Association 5.2 3. Federal National Mortgage Association 5.2 Average of All 3 5.4

The predicted increase in sales in Santa Cruz may be most noticeable in areas such as Aptos and Capitola, where beachfront properties are typically in great demand. Sellers who have been waiting for the ideal moment to market their houses may finally do so, making more homes available. While we don't expect a large number of new listings, even a minor rise might provide buyers with more alternatives and enhance competitiveness, particularly in sought-after coastal and tech-friendly locations.

4. Affordability May Improve Just a Bit

This increase in affordability is good news for potential homeowners, especially those who have battled with the high cost of home ownership in recent years. The drop in the income needed to afford the average U.S. home—from $115,000 to $84,000—represents a significant improvement and could help more families enter the housing market.

For shoppers in Santa Cruz, particularly those considering surrounding communities like Watsonville or Soquel, the increase in affordability owing to slower property price increases and lower mortgage rates may provide little comfort. Santa Cruz County is noted for its high cost of living and competitive real estate market; thus, even little price hikes or affordability improvements may have a smaller impact than in other regions of the country.

5. Economic Influences Will Continue to Affect Markets

The larger economic picture, particularly job growth and consumer confidence, will continue to influence the housing market. Nationally, locations with robust job markets are expected to have continuous demand as individuals seek steady work and long-term housing. Strong economic indicators, on the other hand, may encounter headwinds from global instability and rising energy costs, which might weaken buyer confidence.

The economy in Santa Cruz and its surrounding areas relies heavily on technology and tourism, making it somewhat protected from more enormous economic changes. Many high-skilled, well-paid people from tech and entertainment are moving to places like Capitola and Scotts Valley, which increases the demand for homes, even with the national economy facing difficulties. Thanks to local infrastructure improvements and a wide range of job options, Santa Cruz is likely to stay resilient and attractive for newcomers.

6. Global Economic Factors Will Play a Role

The US housing market is affected by events happening around the world and changes in the economy. Things like political conflicts, trade disputes, and changes in currency values can change how investors feel and influence the economy as a whole, which can then impact real estate markets all over the country. For example, ongoing issues between big economies like the U.S. and China might create uncertainty and influence how much foreign money comes into American real estate.

These global issues might impact Santa Cruz, especially its luxury housing market. Luxury Santa Cruz homes for sale and in nearby places like Pasatiempo, Aptos, and Soquel, CA, attract buyers from other countries who see these coastal areas as safe places to invest. Depending on how global investors feel about the situation, these geopolitical factors could either increase or decrease their interest in buying properties there.

If you're thinking about diving into the Santa Cruz real estate market, it's important to recognize that without the right experience and the ability to adapt to shifting market conditions, it can be tough to make informed decisions. The real estate marketplace is ever-changing, and success requires more than simply forecasts. If you're serious about purchasing a property in Santa Cruz, it's a good idea to consult a local expert. A professional realtor who is familiar with the region may supply you with insider information and help you through the entire process. This type of guidance will assist you in making decisions that not only feel correct but also safeguard your investment in the long run.

Trump's Policies and Their Hidden Effects

President-elect Trump’s bold economic plans—like tax cuts, higher tariffs, more government spending, and deporting undocumented migrants—are all designed to spur growth. But these policies could also push inflation higher, making things even tougher for an already struggling property market in Santa Cruz, CA.

Tax Cuts

Cutting taxes puts more money in your pocket, whether an individual or a business. On the surface, that sounds great, but the reality is that when there’s more money floating around, people tend to spend more. When demand for commodities and services exceeds supply, inflation begins to grow. This can lead prices to rise across the board, from groceries to—possibly—houses for sale.

Increased Government Spending and Borrowing

The government will need to borrow more to pay for these tax cuts and tariffs, which could push the national debt even higher. This could result in higher interest rates, making mortgages more expensive. For homebuyers in Santa Cruz, CA, and across the country, paying significantly more for a property down the line—especially if borrowing costs climb due to the growing government debt.

Tariffs and Inflation

Trump’s proposed tariffs—especially on imports from major world economies like China—could increase the price of goods from electronics to construction materials. Builders (sellers) will likely pass these increases on to consumers if the cost of building homes rises. Santa Cruz’s housing market, which is already dealing with a shortage of homes, could see prices rise even more. This would make ownership far less affordable for people shopping for homes for sale in Santa Cruz or elsewhere in the country.

The Fed’s Role: Lowering Rates Amidst Economic Uncertainty

The Federal Reserve is also a key player in Santa Cruz, CA's housing market. After raising interest rates sharply in recent years to fight inflation, the Fed has started cutting rates in 2024. This move is meant to help stabilize the economy, and for the most part, it’s working. But when you mix that with Trump’s policies, it could lead to some unexpected consequences as things move forward from where we are now.

Recent Trends

In late 2022, the Federal Reserve aggressively raised interest rates until 2023 to counteract rising inflation. By mid-2023, mortgage rates soared to 7.09%, the highest level in twenty years. Then, in September 2024, the Fed cut rates by 50 basis points to encourage borrowing because the economic indicators showed signs of slowing down. The Fed’s decision dropped the federal funds rate pretty significantly, bringing it down to a range of 4.75% to 5%.

Jerome Powell, the Federal Reserve Chair, made it clear on Thursday, November 14th, 2024, that with the economy still growing, jobs looking strong, and inflation staying above the 2% target, there’s no rush to lower interest rates anytime soon. This likely means borrowing costs could be higher for you and your businesses. Powell also mentioned that inflation is on a "sustainable path to 2%," which means the Fed aims to adjust monetary policy gradually to a "neutral setting" that doesn’t try to slow down the economy.

However, there's still some uncertainty about what that "neutral" rate will be in today's economic climate and how quickly the Fed will move toward it. A big part of the equation is how the upcoming policies under the new Trump administration—things like higher tariffs and reduced immigration—might impact both economic growth and inflation. So, while the Fed’s approach will be gradual, the exact path they take could depend a lot on how these new policies play out.

Lower Interest Rates = More Borrowing

Although the Federal Reserve insists it is not in a hurry to decrease interest rates right now, it remains a possibility soon. If they eventually do cut interest rates, borrowing money will become less expensive, allowing you to afford a larger mortgage. This usually leads to an increase in demand for housing. Adding more buyers could push home prices even further in a market like Santa Cruz, CA, where there are already more buyers than properties. Bidding wars may break out as competition heats up, pushing prices even higher.

The Risk of Undoing Progress on Inflation

We have mentioned earlier that the Fed has been decreasing interest rates after years of attempting to control inflation. However, with Trump's growth-focused plans injecting more money into the economy, inflation risks spiraling out of control again. If inflation rises, home prices in Santa Cruz, CA, and elsewhere may climb even quicker, posing new hurdles for first-time buyers and locals seeking to find a home they can afford.

Conflicting Agendas

Trump is trying to get the economy moving, but the Fed wants to keep inflation under control, and this could create a lot of instability. If the Fed lowers interest rates more while Trump’s actions push prices higher, the housing market in this country might go through some serious changes. This might mean paying more for homes because of inflation, while also facing the risk of higher mortgage rates if inflation gets worse.

What Does This Mean for Santa Cruz’s Housing Market?

In Santa Cruz, California, the property market has become unstable because there are many more purchasers than available properties. The development of new homes for sale has not been proceeding swiftly enough to address this issue. Furthermore, Trump's policies and the Federal Reserve's interest rate adjustments may do little to help. Let's look at the two primary scenarios for what can happen in the Santa Cruz, CA, home market.

Scenario 1: Stability with Gradual Growth

If Trump’s tax cuts, tariffs, and spending plans all work together with the Fed’s policies to lower interest rates without causing inflation to spike, we might have a stable housing market. In this case, inflation would be kept in check, interest rates would slowly go down, and home prices would increase steadily. It would feel like everything is running smoothly—no crazy ups and downs, just steady and manageable growth.

Lower rates would make borrowing cheaper, but without inflation running wild, prices wouldn’t spike dramatically. Builders might be encouraged to add supply, but the pace would still fall short of meeting demand. So, if this balance can be achieved, housing affordability will remain tough, but the market won’t explode. Prices will likely increase modestly over time.

Scenario 2: Trump and the Fed fuel a boom.

Let’s say Trump sticks with his aggressive agenda—tax cuts, tariffs, and more government spending—and the Fed keeps cutting rates to boost growth. In this case, the housing market could take off like a rocket. Lower interest rates would bring more homebuyers into the market, with many suddenly able to afford bigger loans. Trump’s pro-business policies might spark inflation, pushing up the cost of materials and homes while creating a buying frenzy as people rush to get in before prices rise even more. Builders just won’t be able to keep up with the demand, which will make the supply shortage even worse and push home prices even higher.

With Trump’s tariff hikes on imports, even construction materials could become more expensive. Since the U.S. imports most of its building materials from countries like China, Germany, and South Korea, this could either make it harder to afford new construction or push those added costs onto homebuyers. In this scenario, housing prices could rise sharply, making affordability even worse for buyers who wait.

So, Should you Buy Now or Wait?

If you wait, your best-case scenario is that rates continue to drop, prices stabilize, and you get a slightly better deal in the future. Your worst-case scenario for waiting is that the market takes off, prices rise rapidly, and you may pay significantly more for the same property down the road.

But if you buy now, your best-case scenario is that you lock in a long-term rate before the market heats up and secure a property at today’s prices. If the market booms, you’ll be in a great position to benefit from rising home values. Now, your worst-case scenario, if you buy now, is that prices and rates drop slightly after you purchase, but the difference is unlikely to outweigh the risk of missing out entirely if prices soar.

The bottom line on housing is that whether Trump’s and the Fed’s policies align or collide, one thing remains clear: we’re unlikely to see housing affordability improve. Supply and demand alone will keep prices elevated, and any delay could mean missing out. So, the smart move is to act strategically now, locking in a long-term fixed-rate loan and targeting high-growth markets before competition and prices heat up even further.

Act Now!

The question isn’t if the housing market will remain challenging; it’s when you’ll decide to jump in and make your move. The opportunity is here—are you ready to take it? If so, let’s talk strategy.

How can you prepare for what’s coming? Here are three actionable steps that you can take right now to position yourself ahead of the curve:

1. Secure financing promptly: With the Federal Reserve signaling potential rate cuts, securing a fixed-rate mortgage before interest rates increase could save you thousands over time.
2. Focus on high-growth areas: Many areas in Santa Cruz County—like Capitola, Watsonville, Scotts Valley, and Santa Cruz, CA—are still seeing population growth and rising demand for housing. Their proximity to Silicon Valley strengthens the housing market, thanks to the booming tech job market. These regions are worth considering if you’re looking to invest or buy a home.
3. Be prepared for competition: Whether you’re buying a family home in Santa Cruz, CA, or investing, expect more competition in the coming months as people take advantage of lower rates and the market picks up steam.

The property market is changing quickly, and staying ahead is critical. Contact us immediately to start arranging your next steps in the Santa Cruz, CA, real estate market.

Paul Burrowes, CRS, CCEC, SFR, NHCP, LHC, REALTOR® Licensed REALTOR® with over 15 years of experience and expertise. Commits to being on time and transparent. Acts as your consultant to ensure you make the best decisions to fit your transaction at every step in the process. Negotiates towards a low-stress, win-win outcome. Handles all the details for you, ensuring the hundreds of steps in your real estate transaction go smoothly. Proudly serving Silicon Valley, Santa Cruz, Monterey, and Santa Clara Counties! | DRE# 01955563 | (831) 295-5130 | paul@burrowes.com.

Helpful Resources

https://www.fanniemae.com/media/53061/display

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https://www.nar.realtor/sites/default/files/documents/forecast-q2-2024-us-economic-outlook-06-27-2024.pdf

https://wellsfargo.bluematrix.com/links2/html/777ed9e3-4b81-4f27-a2fa-55ac6a68f8c6

https://www.nahb.org/-/media/NAHB/news-and-economics/docs/housing-economics/sales/nationwide-sales-and-inventory.