As we begin the year in San Diego County, a look back at 2025 reveals a mixed, yet intriguing, market performance. Home values saw modest appreciation, showing increases in the range of 2.4% to 2.9%. This positive trend in value, however, occurred during a year of significantly diminished sales volume, which was down 3.3% from an already slow 2024. The combination of rising values and decreasing transactions presents an odd paradox: less sales, but higher prices.Understanding the "Mortgage Lock-In Effect"

The primary driver behind this phenomenon, according to many analysts, is the "mortgage lock-in effect." A vast majority of current homeowners hold low interest rates—many in the 3-4% range, and some even lower. This has resulted in two distinct behaviors:

1. Homeowners are staying put. They are choosing not to sell their homes, keeping potential inventory off the market.
2. Sellers are not motivated to drop prices. Homeowners who do list their properties are holding firm on their price expectations. If a home doesn't sell, many are choosing to rent it out, as the financials still "pencil out," rather than selling at a reduced price.

As long as this lock-in effect persists, values are expected to remain stable. Any signs of a positive market shift and renewed consumer confidence will likely trigger further appreciation.Affordability is on the Horizon

While it may not feel immediately apparent, the San Diego market is gradually becoming more affordable. This is not due to a drop in home prices—as values are actually increasing—but rather a slow, compounding effect of several economic factors:

• Home values are maintaining a relatively even pace.
• Incomes are continuing to rise.
• Interest rates are beginning to decline.

This trend is further supported by a younger demographic starting to enter the workforce and increase their earnings, which is expected to eventually catch up with current home values. In essence, real estate is slowly becoming more accessible to buyers.2026 Market Predictions

Historically, the San Diego market has consistently outpaced the national average for home value appreciation, typically by 1% to 3%.

• National Forecast: Most national analysts, including Zillow, Redfin, and the National Association of Realtors, are projecting an average year for real estate with approximately 1.5% appreciation.
• San Diego Outlook: We are more optimistic for San Diego. The significant pent-up demand from buyers sitting on the sidelines suggests a stronger performance. We project that San Diego will see appreciation closer to 3% to 4%. This rate of 3-5% represents healthy, steady growth, which is preferable to the unsustainable spikes of 10-20% seen in previous years.

In terms of sales volume, we anticipate a recovery. We are bullish on transactions, predicting a jump of 5% to 7% in volume and transaction numbers, moving away from the negative sales trend of the previous year.The Political X-Factor

The biggest wildcard for the 2026 forecast is the current political environment. The uncertainty it creates can lead to both motivation and hesitation for buyers and sellers, dictating their decisions around the economy and the world environment. A more certain, positive political and economic climate is the catalyst that could quickly drive the market to "boom," causing appreciation to far exceed current projections due to the high demand and limited inventory.

For any questions about the San Diego market or to discuss your specific real estate goals, please reach out to myself or any member of the True Local Team.