California's massive housing market is showing surprising stability amid the ongoing federal government shutdown, with key metrics like new listings and sale times holding steady. However, beneath this calm surface, early signs of strain are emerging for first-time homebuyers, developers, and those in high-risk flood zones, raising questions about how long this resilience can last.
Key Takeaways
- California's real estate market has not yet seen a significant downturn despite the federal shutdown, largely due to its reliance on conforming, jumbo, and cash buyers.
- Federal programs like FHA, VA, and USDA loans are stalled, creating uncertainty and delays for a smaller but crucial segment of homebuyers.
- The IRS's self-funded income verification service (IVES) remains operational, allowing most conventional mortgage applications to proceed without disruption.
- Developers and builders are beginning to report costly delays in permits and inspections that rely on federal coordination.
- The suspension of the National Flood Insurance Program (NFIP) poses a significant risk, particularly for properties in wildfire-scarred areas prone to flooding.
A Market Holding Its Breath
As the federal government shutdown extends into its third week, its economic ripples are being felt across the country. Yet, in California—a state whose real estate sector contributes nearly $700 billion to its GDP—the housing market appears largely unfazed. Data shows that the market is maintaining its recent trajectory without major disruptions.
"Overall, the California housing market hasn’t shown signs of any major shifts since the government shutdown kicked off," said Hannah Jones, a senior economic research analyst at Realtor.com®. According to recent figures, new listing activity is up compared to this time last year, and the average time a property spends on the market remains stable.
This stability is notable given California's significant use of federal housing programs. The state ranks sixth nationwide for both FHA and VA loan volume and is a major recipient of USDA housing funds. The shutdown has effectively halted or delayed these programs, yet the broader market continues to move forward.
Why California's Market Is Different
The market's current resilience stems from its unique buyer profile. A large portion of transactions, particularly in high-cost metro areas like Los Angeles and San Francisco, are driven by buyers using conforming loans, jumbo loans, or all-cash offers. These financing methods are not directly impacted by the shutdown of federal agencies.
"Buyer demand remains intact in California, as high-income, cash and jumbo buyers, who tend to be common in high-priced California metros, aren't directly affected by furloughs," Jones explained. This segment of the market has provided a strong foundation, preventing an immediate downturn.
The Unseen Engine Keeping Mortgages Moving
A critical component keeping the mortgage industry afloat is the continued operation of the IRS's Income Verification Express Service (IVES). This system allows lenders to verify a borrower's income by requesting tax transcripts, a standard step in the underwriting process for most loans.
Curtis Knuth, CEO of the credit and verification firm Service 1st, confirmed that his company has seen no interruption in this service. "For the divisions that we work with, there's no impact," he stated, noting that normal turnaround times are being maintained. The key reason is that IVES is self-funded through user fees, meaning it does not rely on congressional appropriations to operate.
According to Lisa Binkley, COO of Service 1st, approximately 97% of tax transcript requests through the IVES system are still being processed within three days, a rate consistent with pre-shutdown performance.
This operational continuity has been a saving grace for the majority of homebuyers and lenders, allowing the pipeline of conventional mortgages to continue flowing smoothly and preventing a widespread seizure of the market.
Cracks Begin to Emerge
Despite the overall stability, the shutdown's effects are not zero. The freeze on federally backed loan programs is creating significant hurdles for specific groups of buyers, particularly those with lower down payments or in rural areas.
"I’ve seen a small cooling over the past couple of weeks in buyer enthusiasm, particularly for first-time buyers using FHA or USDA financing," observed Bastien Wissmann, a New Properties & Investment Specialist.
While these buyers represent a smaller share of California's market, their importance cannot be dismissed. In June 2025 alone, California buyers secured $1.9 billion in FHA loans. For those who rely on USDA loans, there are often few, if any, alternative financing options. "The lack of clarity about government operations breeds caution, even among qualified buyers who would otherwise be eager to move ahead," Wissmann added.
The shutdown is also beginning to affect the supply side of the housing equation. Builders and developers are reporting new slowdowns that threaten project timelines and budgets.
"Builders and developers are beginning to complain about the slower processing of permits and inspections," Wissmann said. While many permits are handled locally, some require coordination with federal agencies, which is now stalled. Gary Mkrtichyan, a developer with Opus Builders in Los Angeles, described unprecedented delays on his new home projects, stating, "I’ve never seen this type of slow movement." He estimated that these delays have already cost him nearly $20,000 on stalled projects.
The Looming Insurance and Economic Risks
Perhaps one of the most significant long-term threats is the lapse of the National Flood Insurance Program (NFIP). With the program suspended, no new or renewed policies can be issued. This can bring transactions in designated flood zones to a complete stop, as lenders typically require this coverage.
In California, this issue is compounded by wildfire risk. After a major fire, burned hillsides lose their ability to absorb rainfall, dramatically increasing the risk of floods and mudslides for years. FEMA estimates this elevated risk can last for at least five years post-fire. For buyers in these recovering areas, the inability to secure flood insurance can be a deal-breaker.
"If the shutdown lingers, home sales could see delays related to insurance," Jones warned. "For homes needing a new/renewed flood insurance policy, the suspension of the NFIP puts closings at risk and slows down transaction activity."
A Statewide Economic Powerhouse
The real estate industry accounts for an estimated 18% of California's massive $4.1 trillion economy. According to the National Association of Realtors®, each median-priced home sale in the state generates approximately $230,000 in local economic activity and supports three jobs, from construction workers to furniture retailers.
While the state's housing market has proven resilient so far, the prolonged uncertainty is a growing concern. Shannon McGhan, Chief Advocacy Officer for the National Association of Realtors®, noted that each passing day "compounds these challenges." If buyer confidence wanes and delays mount, the current stability could give way to price reductions and a slowdown that would have consequences far beyond California's borders.
