California’s real estate market is poised for significant growth in 2025, with home sales projected to increase by 10.5% and median home prices rising to $909,400.
However, to make informed decisions, investors, brokers, and borrowers must carefully consider the key factors shaping the market.
In this article, we’ll explore the seven major factors affecting the real estate market in 2025 and their impact on buying, selling, and investing strategies.
7 Factors Affecting the Real Estate Market in 2025
1. Demographics
Key demographic factors such as population growth, age distribution, household size, and migration patterns influence demand for different types of housing. Each generation has unique priorities when it comes to property purchases, which directly influence trends.
For example, Baby Boomers (born 1946-1964) may prefer downsized homes in low-maintenance communities as they approach retirement, while Generation X (born 1965-1980) may prioritize family-oriented housing in suburban areas.
While Millennials (born 1981-1996) and Generation Z (born 1997-2012) are expected to drive demand for affordable housing, only time will confirm. Understanding the preferences of each demographic can help anticipate shifts in demand and better cater to the needs of specific buyer segments.
For investors, taking these factors into account can help identify potential high-value opportunities even before demographic trends fully take shape.
2. Government policies
Government policies, including tax incentives, zoning regulations, and housing laws, are major factors affecting the real estate market.
Changes to property tax laws or rent control regulations can impact both investor behavior and housing affordability. With a new administration, more changes are likely to be implemented.
Staying informed about government actions in 2025 is critical for navigating highly regulated real estate market in states like California.
3. Interest rates
Interest rates are a powerful factor in real estate, directly affecting mortgage affordability and overall market activity. As rates fluctuate, they can either encourage or deter buyers and investors.
According to the Mortgage Bankers Association, mortgage rates are expected to range from 6.4% to 6.6% in 2025, with rates stabilizing at 6.3% in 2026. Similarly, Fannie Mae projects mortgage rates to average 6.5% in 2025, with rates remaining above 6% into 2026.
As interest rates impact monthly mortgage payments, the cost of borrowing directly affects property demand and investment strategies. Understanding these projections can help buyers, investors, and lenders make informed decisions in a shifting market.
4. Supply and demand
The balance between supply and demand continues to drive property values and market dynamics.
In October 2024, the number of newly listed homes went up by 11.2% year over year, indicating a growing supply of available properties. While this uptick in listings is encouraging for prospective buyers, the real impact on the market depends on the rate of demand.
If buyer demand continues to outpace the new supply, property values could remain high, particularly in desirable locations.
This imbalance can lead to more competitive bidding, especially in sought-after neighborhoods, further driving up prices.
5. Economic growth
Local economic growth is a cornerstone of real estate market strength.
In California, industries such as technology, entertainment, and renewable energy are major contributors to economic expansion. Cities like San Francisco, Los Angeles, and San Diego benefit from job creation and income growth, driving real estate demand.
On the other hand, economic slowdowns or industry-specific challenges can affect housing affordability and investment activity.
6. Location
“Location, location, location!” is more than just a real estate mantra; it’s a key factor affecting the real estate market.
The desirability of a property’s location is one of the most consistent factors affecting the real estate market. Factors like proximity to schools, employment hubs, and transportation networks can significantly impact property prices.
In the age of remote work, emerging suburban areas have gained popularity. Many professionals are no longer bound by the need to live near their offices, causing an uptick in demand for homes in quieter, less expensive areas while still offering access to urban amenities.
Additionally, commute-friendly locations remain highly desirable, especially in California’s high-density urban centers. Properties located near public transportation systems or major freeways tend to retain their value, as convenient commuting options are a priority for many buyers.
By understanding the nuances of location trends—including the rise of remote work, growing suburban markets, and proximity to economic hubs—investors and homebuyers can better identify high-potential areas for investment or purchase.
7. External investors
External investors, including foreign buyers and out-of-state investors, continue to influence California’s real estate market. High demand from these groups can drive up property prices, especially in luxury and metropolitan markets.
California’s status as a global economic hub makes it a prime target for international investment. This influx of external capital boosts demand for both residential and commercial properties, especially in sought-after areas like Los Angeles, San Francisco, and Silicon Valley.
As the landscape continues to evolve in 2025, understanding the factors affecting real estate market is crucial for making informed decisions. From demographic trends and government policies to location preferences, these key factors will shape the market in the coming years.
For investors, brokers, and buyers alike, staying updated on these changes can help identify opportunities and avoid potential risks. Whether you're looking to buy your first home, expand your real estate portfolio, or simply stay updated on the latest market trends, proactive research is essential.
For more information or expert advice on all things real estate, feel free to reach out to us at info@sdccap.com.