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California home prices fell 0.6% over the past year, the first annual decline since the pandemic. The Middle Atlantic region rose 6.3%. The national housing market is splitting in two.
U.S. home prices rose 0.4% in August and 2.3% annually, according to the Federal Housing Finance Agency's House Price Index released October 28, 2025.But that national average conceals dramatic regional differences. Expensive coastal markets are declining while affordable interior regions post solid gains.
In August, Pacific prices fell 0.8%, the steepest monthly drop. The Middle Atlantic jumped 1.2%, the strongest gain. A home that sold for $500,000 in California last August now fetches roughly $497,000. That same home in the New York metro area commands $531,500.
Why expensive markets are stumbling
Three forces explain the coastal decline. Years of extreme appreciation pushed prices beyond justifiable levels. Remote work eliminated the premium buyers paid for proximity to job centers. Rising insurance costs and wildfire risks are changing the calculation for California buyers.
The Middle Atlantic's strength reflects different economics. The region offers urban amenities at lower prices than the West Coast. New York metro prices, which softened during the pandemic exodus, have rebounded as return-to-office mandates and international buyers provide demand. The region avoided the speculative extremes now plaguing Pacific markets.
The East North Central division (Ohio, Indiana, Illinois, Michigan, Wisconsin) posted 4.7% annual appreciation, down from 7.0% the prior year. These markets avoided coastal valuation extremes. Strong employment in metros like Chicago and Columbus drives housing demand.
Even hot markets are cooling. The West South Central division (Texas, Oklahoma, Louisiana, Arkansas) saw growth slow to 0.7% from 2.4%. Texas markets are moderating as supply catches demand.
The affordability problem
Monthly mortgage payments for a typical home have risen far faster than incomes. Homeowners with 3% mortgages won't sell to take on 7% rates, constraining inventory and supporting prices even as demand weakens.
The 2008 financial crisis offers perspective. Prices didn't return to pre-crisis peaks until 2016, eight years later. The pandemic pushed the index from 280 in early 2020 to over 430 by late 2024.[2 Current price levels in expensive markets face similar correction risk.
Markets with declining prices see more supply as sellers adjust. Markets still appreciating face acute shortages from minimal construction during the 2010s.
What investors should do
Markets with moderate pandemic appreciation retain stronger fundamentals than those with speculative excess. Focus on employment trends, supply constraints, and price-to-rent ratios. Markets where prices outpaced rents face correction risk. Markets with tight inventory and strong jobs offer stability.
Transaction volumes remain depressed, making price discovery difficult. Appraisals lag actual conditions. Focus on properties where motivated sellers create genuine opportunities rather than relying on automated valuations.
Tax considerations matter more in a low-growth environment. State and local tax burdens, combined with different treatment of real estate investments, separate profitable deals from unprofitable ones. Cost segregation and 1031 exchanges become essential rather than optional.
The outlook
Federal Reserve policy remains the primary variable. Rate decisions directly impact mortgage costs and affordability. Any sustained rate decline would support price stability in markets that have already corrected. But rates won't return to pandemic lows, so the affordability problem persists.
Migration favors Sun Belt and interior markets. Climate considerations increasingly influence decisions, with buyers weighing wildfire, hurricane, and flood risks. Zoning reforms in California aim to increase density, potentially adding supply. But construction costs remain elevated, limiting how quickly supply can respond.
The national 2.3% appreciation runs below inflation, meaning real prices are declining. Regional variations will persist as local factors outweigh national trends.
The data are clear: expensive markets that outran fundamentals are correcting while affordable markets with strong job growth continue rising. For the first time in decades, premium prices don't guarantee appreciation. Investors who recognize this shift will find opportunities others miss.
References
Federal Housing Finance Agency. (2025, October 28). FHFA House Price Index® Up 0.4 Percent in August; Up 2.3 Percent from Last Year [Press release]. https://www.fhfa.gov/HPI
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