Multiple listing service (MLS) inventory remains thin following the historic lows reached at the end of 2021. After a brief bounce in 2022, for-sale inventory in California’s largest metros averages 32% below a year earlier as of August 2023, according to data from Zillow.
While inventory continues to taper in 2023, this is not a reflection of buyer demand — rather, today’s reduced inventory is a sign of sellers’ reluctance to list. As evidence, the number of new listings to hit the market thus far in 2023 range from 32%-36% below a year earlier across the state.
While each major metro in California has seen a negative inventory change over the past 12 months, Riverside continues to experience the least amount of volatility (which is not saying much), with 29% fewer listings than a year earlier as of August 2023. San Diego has experienced the steepest decrease in inventory for sale, down a stark 38% from a year earlier.
Looking ahead, expect inventory to climb gradually out of today’s pit in 2024. Significant mortgage interest rate increases have slashed buyer purchasing power, making it nigh on impossible for mortgaged homebuyers to participate at today’s still-high asking prices. While sellers are also unwilling to list and repurchase in today’s high interest rate environment, the economic recession expected to arrive heading into 2024 (expected to usher in job losses) will push many of today’s would-be sellers into the position of forced sellers.
Then, as inventory grows and home prices plummet, homebuyers will increasingly take a wait-and-see approach to buying. Since the market will soon be firmly in the hands of buyers, real estate agents who wish to maintain a steady income in 2024-2025 will turn their focus to finding those buyers who are willing and able to buy during the downturn.
Chart update 10/05/23
| Aug 2023 | Aug 2022 | Annual change | |
| Los Angeles for sale inventory | 16,200 | 23,000 | -30% |
| Riverside for sale inventory | 11,400 | 16,100 | -29% |
| San Diego for sale inventory | 4,500 | 7,200 | -38% |
| San Francisco for sale inventory | 6,400 | 9,200 | -30% |
| San Jose for sale inventory | 2,000 | 3,000 | -34% |
Here in California, homes typically leave the market more quickly than in more stable markets.
This supply-demand imbalance pushed home prices higher in recent years, even in 2018-2019 when interest rates were still rising. When interest rates fell into the basement in 2020, average California home prices leaped a whopping 40%-60% during 2020-2021 alone.
However, these astounding leaps in prices are now over, and reversing course quickly.
Home prices have declined from their May 2022 peak, ranging from 2% below the peak in the low tier to a loss of 6% in the mid and high tiers as of July 2023. The share of homes for sale with a price cut across California averages 25% at the end of 2022. This is due to the sticky pricing phenomenon, which has today’s sellers pricing their homes at yesterday’s sales levels.
Home prices will find a bottom around 2025, to gradually rise during the recovery from the next recession, expected to arrive officially in the second half of 2023. This timeline will be complicated by global events and any further (unlikely) government stimulus which may occur during the next recession.
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The cure for the inventory shortage
There are only two reasonable possibilities to cure California’s long-term inventory imbalance and general housing crisis:
- decreased demand, via a reduction in the number of homebuyers; or
- meeting current demand with more new construction.
The years beyond 2023 will see a bit of both.
2020-2021 experienced the triple whammy of a pandemic, recession and financial crash. Renters and homeowners alike were unable to make payments due to lost jobs and income. But government efforts to avoid mass evictions kept individuals housed, saving the housing market from any serious disruptions.
Now that the pandemic response is behind us and the economy is fighting high inflation, the Federal Reserve (the Fed) has been actively pushing the economy towards its next recession. This time around, it’s already clear the housing market is not immune, and inventory will continue to swell.
Further, residential construction is due to increase, and soon.
Homeowner and rental vacancies are both near historic lows in California. Whenever vacancies decline, construction is sure to rise to meet demand. But construction has been hampered during this long recovery from the 2008 recession due to strict and limiting zoning laws in California’s metro areas. To that end, several pieces of new legislation have passed since 2017 focused on providing more inventory to combat the housing shortage. These legislative changes include paving the way for smoother permitting and looser zoning laws.
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Carrie –
With all due respect, the low housing inventory has little to do with interest rates. In past years, interest rates have been as high as 10% without having this kind of impact on sellers reluctance to sell their homes. The real culprit is capital gains tax. The federal government has failed to adjust the exemption amount in over 25 years. People don’t want to pay a huge tax bill just for selling their home. Email me if you would like more info.