family in front of house they just bought

California’s real estate markets has been among the strongest in the nation for several years. How will 2017 measure up to the Golden State’s illustrious housing history? We looked at data from the California Association of Realtors and came up with a few predictions. Here are three key predictions for California real estate in 2017:

Prediction No. 1 : Home price appreciation is likely to slow down.

According to the California Association of Realtors, the number of home sales are leveling off and as a result, prices (while still rising) are increasing at a slower pace.  “I think we’re getting close to the peak of the market, but we haven’t really had a stellar recovery either,” Realtor Chief Economist Leslie Appleton-Young told the Orange County Register in a September 29, 2016 article. “What you’re seeing in the California housing market is not what I would consider robust activity.” Although we may be nearing the market’s peak, that doesn’t mean it’s all going to come crashing down in 2017. Instead, real estate experts like Appleton-Young say what we’ll see is more like a “slow squeeze than a big drop.” The chart showing the level of sales of existing single family homes that Appleton-Young included in her forecast report shows 2016 CA sales as flat when compared to 2015. If this trend continues, California could expect to see even lower sales activity going into 2017. Applying the most basic economic rule of supply and demand, with fewer sales taking place, inventory should be able to stay on the market longer and home prices should level off.

Prediction No. 2: Inventory will likely open up.

Then again, with fewer sales taking place, doesn’t that mean it’s possible for prices to continue their rapid increase? Perhaps. But this would likely depend on one factor: inventory. If California’s real estate inventory continues to shrink, home price appreciation may not slow after all. In fact, the opposite effect could take place and California home price appreciation could accelerate.

However, looking at the data from the California Association of Realtors, this appears to be an unlikely scenario. What is more likely to happen is California’s inventory will be allowed some time to grow, thanks to the fact that housing affordability took a hit in the last few years.

Since California’s 2016 home prices are the highest they’ve been since 2007, fewer Californians have been able to afford a home purchase. This made it possible for homes to sit on the market longer while new construction also had a chance to catch up. With more inventory now on the way, it’s possible that 2017 could see more home sales. This is probably what the California Association of Realtors were thinking when they predicted an increase in home sales for 2017, even after a year of decline.

According to the California Association of Realtors, there were a projected 407,300 home sales in 2016. That’s 0.4% less than the number of home sales in 2015. By contrast, the Association forecasts 413,000 home sales for 2017, an increase of 1.4%.

Prediction No. 3 – Affordability will improve, but could remain an issue.

Even with home price appreciation likely to slow, California real estate will continue to be expensive. A Nov. 9, 2016 press release from the California Association of Realtors indicates that housing affordability held steady in the third quarter, despite rising wages and low interest rates.  According to their data, the Association found that 31% of California households could afford to purchase a home at the median price of $515,940 in the third quarter 2016 – unchanged from the second quarter findings.

The good news however, is that this figure was actually up from the 29% who could afford a median-priced home in the third quarter of 2015. So, while affordability may not be improving by leaps and bounds, it does appear to be increasing on a year-over-year basis. This bodes well for 2017 California home buyers.

Check back again soon for more housing market updates and California real estate news.