Mark Schniepp
October 12, 2026
Where is the Recovery?
We originally predicted that 2026 would be a year of housing market recovery. This was approximately a year ago when mortgage rates were steadily in decline, and the inflationary trend was moving lower.
But conditions turned on a dime in late February with the onset of the Iran-Israeli war, raising uncertainty about crude oil supplies leading to higher oil prices and higher rates of inflation.
And so, October is another distressing month for California housing.
Homeowners aren’t selling, homebuyers aren’t buying, and new housing developers are delaying building.
The average 30-year fixed mortgage rate in California has climbed to 7.4 percent driven by soaring 10-year Treasury yields and lingering economic uncertainty principally attributed to the Middle East war and the flow of crude oil.
The California housing market in 2026 has a statewide median home price of $901,640 in August 2026, per the California Association of Realtors. In late July, the Legislative Analyst’s Office reported that the monthly mortgage payment for a “mid-tier home” ($775,000 median price), in California was $4,700 per month, 68 percent higher than the monthly rent on a comparable 2 bedroom home.[1]
Locked-In Homeowners
Roughly 76 percent of California homeowners hold mortgage rates below 5 percent, making them reluctant to sell and give up low rates or favorable property tax assessments. For-sale inventory which was rising earlier in the year has reversed.
Slower Sales & Inventory Scarcity
Home sales volumes have slowed, with average days on market rising (exceeding 100 days in areas like Orange County) and only 43 percent of sellers planning to purchase another home. After rising into March 2026, total for-sale inventory in California has declined 20 percent.
Slowed Construction
Single family home construction has slowed after a feverish pace during the first quarter of 2026. This is due entirely to higher construction borrowing rates and higher financing rates for buyers, both of which started rising in earnest last March.
Flat Pricing Despite Affordability Squeeze
Even with demand cooling and buyers facing a severe affordability crisis (where only 18 percent qualify for a mid-tier home), tight housing inventory and high construction costs have kept statewide prices relatively flat rather than triggering a market crash due to moderating demand.
| Assessment of the California Housing Market | ||
| Indicator | Last Month | What it Implies |
| Median Home Price | $901,420 | Though year over year appreciation is a scant 0.3 percent, values are close to all time record highs |
| Existing home sales | Annual rate of 270,000, very low | Year over year increase of 1.4 percent; |
| New homes permitted | 8,300 in July and 9,600 in August | Higher for the year compared to 2025, but slowing way down in recent months due to mortgage rates |
| Inventory | Only 3.7 months of inventory; a decline of 20 percent since March, and half the rate of a normal market | Declining again as sellers withdraw their homes for sale |
| Inflation | Still above the Fed’s 2% objective | The main macroeconomic constraint and reason for high mortgage rates |
| Mortgage rates | 7.4 % highest level since Nov 2023 | High rates have reduced buyer demand and seller incentives to list their homes |
What is the Prediction for Housing now ?
As long as the war prolongs uncertainty about the supply chain, crude oil prices will remain elevated (up 35 percent today compared to pre-war prices), inflation will remain far from the Fed’s target rate, and interest rates will be slow to contract.
A resolution to the war would change conditions quickly, though the improvement on inflation will lag downward crude oil and gasoline price movements.
This is effectively what we are waiting for, which could come as early as November. If this can be convincingly engineered by the administration who now claim control over the Strait of Hormuz, we could expect some form of housing market recovery in 2027, observing meaningful results by mid-year.
Otherwise, a prolonged period of elevated interest rates will retain the status quo behaviors for buyers and sellers in the housing market, and a delay to the recovery will be stalled yet another year.
[1] https://lao.ca.gov/LAOEconTax/Article/Detail/793
The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.
