Homebuyers are having more trouble finding homes for sale lately. But a glance at the multiple listing service (MLS) indicates inventory is healthy — so what’s going on? Is homebuyer demand simply outpacing the number of homes for sale?

The problem is the type of inventory available. In most places of California, nearly half of inventory for sale consists of high-tier homes. Thus, there is an acute disconnect between what type of home is available in California’s already meager supply of homes, and what people want.

high-tier-inventory-share

This chart shows the percentage of homes for sale that fall in the high tier, averaged across California’s 10 largest metro areas, according to Zillow.

High-tier homes are homes valued in the top third of all homes in a given area, using the repeat sale method.

High-tier homes make up a disproportionate 45% of home for sale in California as of January 2017. Of California’s biggest metro areas, Ventura has the highest share of high-tier homes in the for-sale inventory, at just over 51%. San Jose has the lowest, with just 31% of the inventory in the high tier.

This puts a lot of pressure on buyers searching in the mid- and low tier. First-time homebuyers rarely buy in the high tier, thus breaking into homeownership is becoming more difficult as the inventory shifts to the high tier and new entrants are priced out of the market.

Related article:

Fewer low-tier homes for sale in California

Desperate straits for starter homes

To qualify for a starter home, as of the second quarter (Q2) of 2015, the average first-time homebuyer needed:

  • 9% more income than a year earlier in Oakland;
  • 8% more income than a year earlier in San Diego;
  • 7% more income than a year earlier in Los Angeles;
  • 7% more income than a year earlier in Orange County;
  • 7% more income than a year earlier in Sacramento;
  • 6% more income than a year earlier in San Francisco; and
  • 5% more income than a year earlier in Riverside, according to Trulia.

The reason is entirely due to the home price increase in the low tier, not matched by the high tier. As of January 2017, California home prices average 9% higher than a year earlier in the low tier as homes continue to get promptly snatched up by hungry first-time homebuyers. High-tier homes averaged just 4% higher than a year earlier, and the increase continues to slow as homes sit on the market and the high-tier inventory swells.

This is a problem for agents representing buyers and sellers operating in both the high and low price tiers, as it ultimately means slower home sales volume. This is not a good thing for sales, and not a good thing for fees.

The solution will be more residential construction — specifically of condominiums in desirable locations and other low-tier homes within reach of the first-time homebuyers and retirees who will soon flood the market. Builders will rise to meet that demand once local legislators zone for more building. Read more about that here.