Multiple listing service (MLS) inventory has risen from the historic low reached at the end of 2021. After two years of steep decline, for-sale inventory in California’s largest metros averaged just 1% below a year earlier as of May 2022, according to data from Zillow. The winter months typically see the lowest inventory of homes for sale, peaking around mid-year.
The inventory decline is currently steepest in Los Angeles, with 13% fewer listings than a year earlier as of May 2022. On the other hand, Riverside saw a slight increase in inventory for sale compared to the prior year. Either way, inventory remains near historic lows throughout the state, now rising from the bottom reached at the end of 2021.
Looking forward, expect inventory to climb heading into 2023. The significant interest rate increases of 2022 have slashed buyer purchasing power, making it nigh on impossible for mortgaged homebuyers to compete. Along with high inflation, the signs are pointing to a rapidly approaching downturn in the housing market — of which homebuyers and sellers are well aware. Today’s seller’s market has already begun to tip, with prices to follow in Q4 2022 as inventory grows and homebuyers increasingly take a wait-and-see approach to buying.
Here in California, homes typically leave the market more quickly than in more stable markets.
This is reflected in the average number of days a home sits on the market in California before being snatched up by eager buyers. At the end of 2019, the average number of days a home sat on the market before achieving a “pending” status was 32 days. Flash forward to 2022 and the average days-on-market is at a record-low 15 days.
This supply-demand imbalance has pushed home prices higher in recent years, even in 2018-2019 when interest rates were still rising. Average California home prices were 20%-28% higher in the first quarter (Q1) of 2022 compared to the prior year. This price rise is at odds with the dramatic cut to buyer purchasing power due to increased mortgage interest rates. However, the sticky pricing phenomenon means today’s sellers will continue to price their homes at yesterday’s sales levels for several months before price drops become significant enough to turn the market.
Expect prices to decline heading into 2023, the result of:
- higher interest rates;
- long-term job losses; and
- increased buyer caution.
Home prices will find a bottom around 2025, to gradually rise during the recovery from the next recession, expected to arrive heading into 2023. This timeline will be complicated by global events and any further (unlikely) government stimulus which may occur during the next recession.
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 2022 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) is actively pushing the economy towards its next recession. This time, housing will not be immune, and inventory will 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.