In July, a first tuesday poll asked readers what bearing the 2020 recession will have on California’s for-sale inventory.

The response was mixed — while 45% of respondents argued inventory is likely to go down as a result of pandemic-scared sellers and reduced construction, a close 39% foresaw construction trending the other direction, leading to more rental vacancies and an increase in multiple listing service (MLS) inventory.

The remaining 16% saw the recession as having no impact on the MLS inventory.

However, the recession — and the accompanying pandemic — has already had an effect. Inventory declined steeply in March as lockdown orders brought much of the California housing industry to a standstill.

When for-sale inventory is down, sales volume naturally declines along with it. Buyers have fewer options, limited mostly to a meager crop of higher-priced homes — in other words, a shortage of available housing.

Typically, the number of new listings corresponds with expansions or contractions to the MLS inventory. The more new listings, the higher the inventory, and vice-versa. While the number of new listings has fluctuated depending on the severity of response to the coronavirus (COVID-19) pandemic across the state, fewer sellers have tended to list during the recession. Thus, inventory has plummeted in every major California metro area, down 27% in Los Angeles and a full 38% in Sacramento compared to the year prior, as of August 2020.

Moreover, buyer demand has outpaced the scant new listings that hit the market, along with the few newly constructed homes available in 2020.

Construction blues

Where construction is concerned, worries over social distancing kept builders cautious at the onset of the pandemic. As the situation escalated, demand for single family residences (SFRs) began to outweigh demand for cheaper multi-family units, where cramped quarters exacerbate the threat of spreading disease. As a result, new construction has less room to combat falling for-sale inventory.

It is important to note that the decline in construction began before the pandemic hit, and its effects may continue after it is over.

However, declining vacancies signal an imminent uptick in California construction starts. An end to the pandemic won’t hurt, but this recovery probably won’t occur until the rebound from the 2020 recession arrives, likely in 2022-2023.

Additionally, housing legislation passed in recent years is paving the way for the fight against California’s housing shortage, aimed at increasing the amount of affordable housing in the state. The main culprit when it comes to the shortage is overly restrictive zoning laws. Much of this recent legislation is aimed at loosening those restrictions, as well as smoothing out the permitting process for builders to provide low-cost multi-family housing where it is needed most.

New construction and affordable housing legislation will go a long way toward increasing for-sale inventory in California — and addressing our worsening housing shortage.