Low inventory in California signals more construction

California agents and homebuyers are feeling the squeeze of low inventory.

The number of homes for sale is 9% below a year earlier as of January 2016. This continues a steady, nationwide decline in home inventory from 2011. In fact, today’s home inventory is 38% below what it was in mid-2011. Granted, 2011 likely had an oversupply of homes on the market. But is today’s inventory too low to meet homebuyer demand?

To provide an answer, let’s look at the trends:

The chart above shows California’s home inventory available for sale—the blue line—alongside the number of homes sold, monthly—the red line. For clarity, the home sales volume line is magnified so the trend is easily seen, and corresponds with the right axis. The home inventory line corresponds with the left axis and this number is in fact much larger than the number of homes that sell each month.

When the home sales volume number is expanded and placed on top of the inventory line, as in the chart above, a trend takes shape: when sales volume declines, home inventory goes up. When sales volume increases, inventory goes down. This is axiomatic.

Most recently, home sales volume slowed in 2014, ending the year 7% lower than at the beginning of that year. As a result, inventory rose. This occurred because homes were selling more slowly than new homes came on the market. In 2015, the reverse occurred. Sales volume took off, ending the year 9% higher than the end of 2014. Demand for homes increased more quickly than new homes came on the market, thus inventory declined.

Therefore, while it is true that inventory is low at the start of 2016, it’s for a very good reason. California had a great year for home sales volume in 2015, and a lower inventory is the price paid for increased home sales.

All of this has to do with homebuyer demand, which ultimately drives the direction the housing market takes. As we head through 2016, demand continues to outpace inventory. This is good news for sellers, as more demand for a shrinking supply leads to higher prices.

Inventory declines across California’s regions

In the Los Angeles metro area, inventory peaked in mid-2011 with 49,000 homes on the market. In January 2016, there were 18,100 homes on the market, tied for the lowest number of homes on the market since after the 2008 recession, according to Zillow.

In Riverside, inventory also peaked in mid-2011, at 29,400 homes for sale. It bottomed in 2013 with under 13,000 homes on the market. In January 2016, there are 16,400 homes for sale.

Sacramento is not unlike Riverside, also having bottomed in 2013 at just 3,800 homes on the market. January 2016 saw the lowest number of homes for sale since 2013, with 4,700 homes for sale. The last peak was in mid-2011 at 10,400 homes available for sale.

San Diego’s 2011 peak saw nearly 18,000 homes on the market in a single month. As of January 2016, there were 5,600 homes for sale, the lowest since the 2008 recession.

On the other hand, San Francisco has experienced a consistently low inventory since 2013. 4,200 homes were on the market in January 2016 in the San Francisco area. This is down from the peak of nearly 14,000 homes on the market in mid-2011. After descending from its 2011 peak, it’s bumped along in the 4,000-5,000 range each month since 2013.

San Jose has experienced a trend similar to San Francisco’s. Having remained consistently low since 2013, there were just 1,800 homes on the market in January 2016. This is down from the 2011 peak of 5,200 homes.

Low inventory points to future construction

As inventory continues to shrink in California, what’s a homebuyer to do?

Those determined to buy will not be shut out of the market — it just may take a bit longer for their homeownership dreams to come true.

If your homebuyer is frustrated with the lack of available inventory, consider pointing them to new construction. In fact, the number of new homes sold before construction has even broken ground is at a decade-high, according to Trulia. Construction on 32% of new home sales had not yet been started before being purchased as of January 2016. (This is good for homebuyers, as new construction includes extra energy efficient improvements, which will ultimately reduce the homeowner’s monthly costs).

Homebuyers reluctant to compete for today’s low inventory of homes may also turn their sights to the suburbs, where inventory is more plentiful and bidding wars less common. Further, areas with the lowest inventory are also experiencing a smaller increase in home prices. Rapid home price growth will eventually pull back home sales volume in these areas, and inventory will begin to climb again. Expect this to occur towards the end of 2016 or beginning of 2017.

Meanwhile, residential construction will continue to grow in 2016 and in the coming years as first-time homebuyers finally hit the market after years in the shadows following the 2008 recession.