How does new residential construction in older residential neighborhoods impact the average rent of existing homes in the area?

  • New construction tends to drive up rents in existing properties (80%, 35 Votes)
  • New construction tends to drive down rents in existing properties (14%, 6 Votes)
  • No effect on existing properties (7%, 3 Votes)

Total Voters: 44

Inventory fell to record lows in 2021, forging a spike in home prices.

Nationwide, there were 20% fewer homes listed on the multiple listing service (MLS) in December 2021 compared to a year earlier. On a monthly basis, inventory was also down in 49 out of 50 of the nation’s largest metros at the end of 2021.

While the end of the foreclosure moratorium and rising forbearance exits have contributed slightly to the for-sale inventory, they have fallen short of creating a positive trend for inventory. As it is, inventory in 2022 remains at historic lows.

As of December 2021, the inventory shortage in California ranges throughout the state’s top metros, including:

  • San Jose, at 31% below a year earlier;
  • Los Angeles, at 30% below a year earlier;
  • San Diego, at 28% below year earlier;
  • San Francisco, at 22% below a year earlier;
  • Bakersfield, at 14% below a year earlier;
  • Sacramento, at 13% below a year earlier;
  • Riverside, at 7% below a year earlier; and
  • Fresno, at just 1% below a year earlier, according to data from Zillow.

Fresno stands out due to its basically flat level of inventory. Compared to higher-cost, coastal metros, Fresno has looser, less restrictive zoning laws. This has allowed for more construction to meet the high demand for housing.

In fact, many of the inland, lower-cost metros had lower declines in their inventories. Bakersfield, Sacramento and Riverside each saw considerably lower declines than high-cost coastal metros. Areas with less restrictive zoning and room to grow in terms of construction are doing much better at trying to meet the ever-growing demand for housing, reflected in less painful price increases.

However, with inventory still at record lows, even in inland metros, and little growth pushing forward – there remains a gruesome road ahead to recovery.

Related article:

California’s for sale inventory: a symptom of homebuyer demand

The road ahead for inventory

With the expiration of the foreclosure moratorium now passed and forbearance exits increasing, expect to see forced sales return, providing some solace for inventory, increasing days-on-market and, soon enough, price cuts. Home prices jumped in 2021, but will not be doing so in 2022. We are seeing year-over-year growth subside. Expect home sales volume to fall back due to these factors, along with:

  • lower homeowner turnover;
  • a lack of support from interest rates, which have begun to jump in February 2022; and
  • the ongoing, slow recovery of jobs lost to the 2020 recession.

The only sure way out of the inventory hole is through increased residential construction. A consistent increase in construction starts is key for a healthy housing market, and the only viable long-term solution for a lack of inventory.

Building material shortages have continued into 2022, but other prevalent obstacles for construction also remain – like rising mortgage rates, and California’s restrictive zoning regulations, which stifle new housing.

Look to the post-recovery period of 2024-2025 for a return of sufficient housing starts. Until then, our inventory issues will remain, creating volatility in the housing market — and, for real estate professionals, transaction fees.