The Southern California housing market, long characterized by sky-high prices and intense competition, is undergoing a major shift as we approach the second half of 2025. For years, sellers have reaped the benefits of bidding wars, low inventory, and a market that favored them. But as interest rates continue to rise and inventory levels slowly increase, we are witnessing a shift toward a more buyer-friendly environment, providing opportunities for buyers that have been missing from the market for several years.
Inventory Levels on the Rise
As of June 2025, the number of homes available on the market in Southern California has increased significantly. In the first quarter of 2025 alone, the inventory of homes for sale rose by 28% compared to the previous year. This increase in inventory can be attributed to various factors, including higher interest rates, which have cooled the demand for homes and caused some sellers to reconsider their price expectations.
In metropolitan areas like Los Angeles, San Diego, and Orange County, this surge in available homes is a welcome sight for prospective buyers. Historically, these regions have faced housing shortages, driving up prices and leaving many buyers out of the market. However, with more homes being listed, there’s hope that affordability might improve, especially for first-time buyers.
“More homes on the market means less competition, which gives buyers a better shot at negotiating a fair price,” says Sarah Nelson, a real estate agent based in Los Angeles. “We’re also seeing some sellers willing to accept lower offers or include concessions like covering closing costs, which was unheard of just a couple of years ago.”
Price Reductions and Seller Concessions
One of the key indicators of the shift toward a buyer’s market is the rise in price reductions. According to data from the California Association of Realtors, nearly 30% of homes listed in May 2025 experienced price cuts. In some of the more competitive markets, like the Greater Los Angeles Area, home prices have dropped by as much as 6% year-over-year.
“The days of listing a home and expecting multiple offers above asking price are over,” Nelson notes. “Sellers are now being more realistic about what their homes are worth, and buyers have more room to negotiate.”
The slowdown in the market is being fueled in part by rising mortgage rates. The Federal Reserve’s decision to raise interest rates to combat inflation has made borrowing more expensive for homebuyers. In fact, the average rate on a 30-year fixed mortgage recently surpassed 6%, a sharp contrast to the sub-3% rates that were prevalent during the pandemic. For many potential buyers, this increase in mortgage rates has had a cooling effect on the market.
Shifting from a Seller’s Market to a Balanced One
For much of the past decade, California’s real estate market has been heavily skewed in favor of sellers. Inventory shortages and low interest rates led to intense competition among buyers, driving prices up and making it difficult for many to afford homes. However, with mortgage rates rising and home prices stabilizing, many industry experts believe we are entering a period of balance.
“We’re not yet in a full buyer’s market, but we’re getting closer,” says John Moffatt, a senior analyst with Zillow. “It’s a much healthier environment for buyers, and they have more options now than they’ve had in the past few years.”
In addition to price reductions, there are signs that the rental market is also shifting. As potential homebuyers opt to rent rather than buy due to higher mortgage rates, the rental market has seen a slight increase in vacancy rates. This is particularly true in urban areas like Los Angeles, where rents, after increasing rapidly over the past few years, have leveled off.
The Luxury Market
While the general market is cooling off, there are some segments that continue to thrive, particularly the luxury real estate market. In areas like Beverly Hills, Malibu, and Santa Monica, high-net-worth individuals are still purchasing multimillion-dollar homes. These buyers are generally less affected by the rising interest rates and have the means to pay cash for properties or secure favorable financing terms.
In Malibu, the average home price has increased by 5% year-over-year, driven by continued demand for coastal properties. “The luxury market in Southern California has been fairly insulated from the broader downturn in the market,” says Moffatt. “While many buyers are holding off on purchasing in the general market, luxury buyers are still active.”
Luxury homes often come with unique amenities like private beaches, panoramic views, and expansive lots, making them highly sought after by wealthy buyers looking for a lifestyle upgrade.
What’s Next for the Market?
Looking ahead, experts predict that the Southern California housing market will continue to face challenges through the remainder of 2025. Mortgage rates are expected to remain elevated, which may keep some potential buyers on the sidelines. However, with more homes entering the market, there is hope that price increases will level off, and homebuyers may have more negotiating power than they have had in recent years.
For first-time buyers, the current market offers a better chance at entering homeownership, though they may still face challenges with high prices and increased competition in the most desirable neighborhoods.
The market is expected to remain volatile, and while it’s not certain that we’ll see a sharp decline in prices, the days of fast-paced bidding wars may be behind us for the time being. As more inventory becomes available, buyers can expect a more balanced and less competitive environment, which may provide greater opportunities for those willing to wait for the right property at the right price.
Conclusion
California’s housing market in 2025 is characterized by a shift towards balance. While rising interest rates and higher inventory levels have slowed down some of the intensity in the market, the trend toward a buyer-friendly environment presents new opportunities for homebuyers who were previously sidelined in the competitive landscape. Whether this trend will hold remains to be seen, but for now, buyers can take advantage of less competition and more negotiating power in a market that once seemed impossible to enter.
