The Mortgage Landscape: Lower Rates, But Still High

The Washington Lifestyle Favors Long-Term LivingCalifornia’s housing market continues to challenge prospective buyers as affordability remains historically low. Driven by mortgage rate changes, home price trends, and economic shifts, affordability in the Golden State has shifted considerably from last year to today. Understanding these trends helps California homebuyers gauge whether current conditions offer more opportunity or if barriers persist.

One of the most important drivers of home affordability is mortgage interest rates. Over the past year, the average 30-year fixed-rate mortgage in the United States, including California, has fallen from about 7 percent to approximately 6.06 percent as of early 2026. This marks the lowest level in more than three years and represents a meaningful drop compared to the highs of late 2024 and early 2025.

Lower mortgage rates reduce monthly payments and improve purchasing power. For many buyers, this means being able to afford slightly higher home prices while keeping monthly costs similar or lower than last year. However, even with this drop, mortgage rates remain above historical norms. Buyers are still adjusting to a reality where 3 percent rates are no longer available, and many are recalculating what they can afford.

Impact on Buyer Activity

With rates declining in recent months, we have seen a gradual increase in buyer activity. Lower borrowing costs have encouraged some prospective homeowners to re-enter the market. However, because rates are still relatively high compared to pre-pandemic levels, the rebound in affordability has been modest.

How California’s Affordability Has Shifted

Statewide Affordability Index

Despite some easing in borrowing costs, California’s housing affordability has remained near all-time lows. According to the California Association of Realtors, affordability has improved only modestly from last year and often varied across quarters in 2025. In the first quarter of 2025, about 17 percent of California homebuyers could afford a median-priced single-family home. That was a slight increase from 15 percent at the end of 2024.

In the second quarter of 2025, the statewide affordability index showed 15 percent of households could afford a median-priced home. While this reflected a small improvement over the previous year, it still represented a deeply challenging landscape for buyers.

In the third quarter of 2025, about 27 percent of households could afford a condo or townhome. These properties tend to be more accessible for first-time buyers and younger households, but even this level of affordability remains well below historical averages.

Historically, California's affordability index was often above 30 percent in many regions. The fact that statewide levels now hover around 15 to 17 percent highlights the pressure buyers face. These figures show that affordability has improved in the short term, but the broader trend remains unfavorable.

Home Prices: Moderation, But Still Elevated

Slower Price Growth

After years of rapid appreciation, California’s home prices have shown slower growth and some cooling in 2025 compared to earlier peaks. Median home prices in the third quarter of 2025 were slightly lower than the previous quarter but still above year-ago levels. This moderation is helpful, as it limits further upward pressure on monthly mortgage payments.

Slower home price growth has been driven by several factors: higher interest rates earlier in the year, more cautious buyer sentiment, and slight increases in inventory. Still, prices remain high compared to incomes. The price-to-income ratio in California is among the highest in the nation, particularly in urban centers.

Some parts of California have experienced greater price corrections than others. Inland regions and less densely populated counties have seen modest declines or flat growth. In contrast, coastal areas like San Francisco and Los Angeles have remained more resilient, although even those markets are no longer seeing double-digit price increases.

Comparing Year-Over-Year Mortgage Conditions

Mortgage Rates

Mortgage rates in early 2026 are down nearly a full percentage point from a year ago, reducing borrowing costs and slightly improving buyer purchasing power. In early 2025, rates hovered around 7 percent, which discouraged many buyers and slowed down the housing market. The drop to just over 6 percent has opened the door for more buyers to re-engage.

Affordability Index

California’s affordability index has improved only slightly from last year. While some quarters in 2025 showed minor improvements, the overall ability to purchase a home remains near historic lows. For many buyers, particularly first-time buyers, affordability continues to be constrained by high prices and the lingering effects of higher borrowing costs.

Home Prices

Home price growth has slowed, but prices remain high relative to income. This means the benefits of lower rates are partially offset by elevated prices. For buyers in 2026, the decision to purchase often comes down to location and individual financial readiness rather than broad market trends.

Regional Variations Within California

Differences by County

Affordability trends vary widely across the state. Counties with lower median prices and incomes often show higher affordability indices. High-cost metropolitan areas like the Bay Area and Southern California remain significantly less affordable. For example, counties like Lassen offer greater affordability, while places like Monterey and San Mateo remain among the least accessible.

These differences make it essential for buyers to consider regional market data when planning a home purchase. While statewide trends are informative, local conditions will have the most direct impact on buying decisions.

Key Implications

California’s housing affordability remains among the most challenging in the country. Compared to last year, buyers benefit from lower mortgage rates and slightly softer price growth, but obstacles persist. Only a small percentage of households can afford to buy a median-priced home, and high prices continue to outpace income gains.

As we move through 2026, prospective buyers should stay informed about changing market conditions. Working with a knowledgeable mortgage broker like LBC Mortgage can make all the difference. We offer tailored solutions and expert advice to help buyers navigate today’s market and achieve their homeownership goals.