Fewer new listings as California’s for-sale inventory dips

California’s resale housing inventory is defying gravity in 2023 — but why?

Today’s ongoing economic indicators of strengthening recessionary conditions in the housing market, in their order of their financial influence, include:

• the mortgage interest rate bounce of 2022;
• anemic sales volume, slipping since Q1 2022;
• the home price retreat beginning in June 2022; and
• slowing job growth, with job losses on the horizon.

Would-be homebuyers — prospective buyers represented by agents — are eager to purchase. However, driven by current economic conditions they are, reluctantly, unwilling to buy, due to:

• the elementary logic of waiting until prices bottom; or
• their refusal to downgrade their expectations for amenities in a home prescribed by the amount of purchase-assist funding available at current high mortgage rates and seller pricing.

So, they must wait, continuing to rent which is feasible, until seller pricing caves (likely) or mortgage rates drop significantly (unlikely).

These factors take place and play out in every housing recession. Collectively, and over a period of 24-to-36 months — which began in April 2022 — they increasingly reduce buyer activity (until they don’t).

A slowdown in buyer acquisitions generally increases multiple listing service (MLS) inventory except during the annual Q2 spring homebuying bounce, all classic aspects of a housing slowdown. In turn, homes for sale sit on the market for ever greater periods of time. At some point, sellers and their agents catch on, learning how to play by acknowledging recession rules.

Related chart:

California’s for sale inventory: a symptom of seller reluctance in 2023

Eventually, sellers adjust asking prices to a level where the reservoir of ready buyers become willing and able to restart the recovery cycle. That price point level appears when prices intersect and cross over the historic mean price trendline for California property. This moment is expected to take place in early 2025 at the current pace of price adjustments.

But California’s housing situation in 2023 has its complexities. The forces distorting the pace of the buyer’s market are mostly the remaining ripple effects from pandemic economy activities.

For instance, across California’s largest metros, the for-sale inventory is down 14% from a year earlier as of March 2023. In contrast, the U.S. average for-sale inventory is meeting recessionary expectations, up 9% over the past year, according to Zillow.

By metro, today’s MLS inventory compared to a year earlier is down:

• 7% in Los Angeles;
• 14% in San Diego;
• 17% in Sacramento;
• 23% in San Francisco; and
• 32% in San Jose.

The state’s only major metro with a year-over-year increase in inventory is Riverside, which has 6% more homes for sale than a year earlier as of March 2023.

While the for-sale inventory of homes is down 14% on average, California home sales volume was a whopping 33% below a year earlier in March 2023. Thus, the ratio of properties available per buyer is up over a year earlier.

Nationally, some of the inventory rise can be attributed to greater levels of new construction, as new construction today makes up one-third of for-sale inventory, three times the average level of 10%, according to the National Association of Homebuilders (NAHB).

California is a total contrast, with not-in-my-backyard advocates (NIMBYs) interfering with price adjustment by preventing new construction starts.  Here, residential construction has decreased alongside inventory over the past year, with multi-family construction down 7% in the last half of 2022 and SFR construction down 19%.

Related article:

California Attorney General clashes with NIMBYs in Huntington Beach

Necessitous sellers are yet to arrive

The number of new listings arriving monthly has shrunk dramatically over the past year. Fewer listings are hitting the market across the state, reduced to owners who have a need to sell now or sell within the next few years when prices will be lower than today.

Compared to a year earlier, the number of new listings in March 2023 — typically the start of the busy spring buying season — is down:

• 35% in Los Angeles;
• 36% in San Diego;
• 40% in Riverside;
• 41% in San Francisco;
• 44% in Sacramento; and
• 45% in San Jose.

Increasing owner hesitation to list and sell their home will continue. Today’s higher interest rates mean homeowners who purchased or refinanced anytime in the past decade are eager to avoid paying more interest. Without sufficient replenishment of inventory, homebuyers set on buying today will need to overpay even as prices are on their way down.

However, some relief is on the 2024-2025 horizon for homebuyers: with any housing market recession comes a rise in foreclosure activity. The reasons are straightforward, absent pandemic-induced distortions.

As routine mathematical reality, declining home prices plunge recent mortgage-funded homeowners underwater. They are under-capitalized and, on their financial balance sheet, insolvent; saddled with more debt than the value of their assets. Without equity sufficient to close a traditional home sale and pay off the mortgage, homeowners who are forced to sell due to a job loss or relocation will take the only route left to them: a distressed sale to get rid of the property.

These non-conventional sales initially take the form of a a foreclosure sale. Here, the lender acquires and resells the property as real estate owned (REO) inventory, continuing their custom during a marketplace of rising prices for managing homeowner defaults. Eventually, foreclosing lenders discover they can cut their losses by participating in a short sale where the homeowner finds a buyer, not the lender. Here, the lender agrees to discount the payoff of the mortgage balance as full satisfaction of the mortgage since they cannot collect their losses from the borrower.

When distressed sales rise, prices will drop further as part of a vicious cycle event in a typical garden-variety recession. Only in this cycle does a true buyer’s market take hold.

Watch for a return of real estate speculators and long-term buy-to-let investors around 2026 to help jumpstart the housing market. Once property prices bottom and do not drop lower for some 12 months, buyer-occupants will then feel confident enough to return in meaningful numbers.

Related article:

How to prepare for the REO resurgence