Honey, who shrunk the real estate market? Where all the listings have gone and if they’re ever coming back

The start of 2022 ushered in another new, all-time low for the fewest active single family residences (SFR) on the market in Santa Cruz County. Only 75 homes were available in the first week of January in any price range, anywhere in the County. That’s not enough to sustain any real estate market other than the “crazy” one we’ve been experiencing for the last few years. Here’s a deeper dive into the what, how, and why of low inventory.

Conventional wisdom has always considered a 4-6 month active supply of homes at any given time to be a “balanced” real estate market. One that isn’t overly weighted in favor of either the selling or the buying side of the equation. The number is derived by dividing the active supply by the average number of monthly transactions. For instance: If the market has 800 active listings and is averaging 200 sales a month then, there is a well-balanced, four month supply of homes.

Any market with less than four month’s supply is deemed a “seller’s market” and any market with more than six month’s supply is a “buyer’s market”. And of course, the 4-6 month no man’s land in between is where an equitable amount of give and take from both sides is supposed to take place. As any experienced agent can attest, there’s a world of difference between the two ends of the supply spectrum depending on which direction you enter the market from. For sellers, there’s nothing that feels like manna from heaven more than a seller’s market does. If you happen to be a buyer in a seller’s market, there aren’t many experiences that feel worse (just ask anyone who has recently purchased).

When it comes to being a seller or a buyer in a buyer’s market that’s something else entirely. I’m not sure there are very many people out there who can remember what that’s like anymore. The majority of today’s real estate agents have never even worked in a buyer’s market. We haven’t seen anything remotely resembling a buyers market for more than ten years and counting now and over the last thirty years, we’ve only experienced two extended “buyers markets” that afforded buyers the upper hand in negotiations.

One of those took place between 1991 and 1996 (ancient history), when supply crept as high as eleven months (over 1600 SFR listings in Santa Cruz County) and houses routinely sat on the market for a year. The other took place between 2008 and 2011 (the Great Recession) when the mortgage market imploded and inventory levels rose well above twelve months (over 1400 SFR listings with a lot fewer sales) largely because distress properties (short sales and REOs) were flooding the market.

From our vantage point in early 2022, it has been a long time since buyers were lucky enough to have as much as 4-6 months of active inventory to look at and choose from. This fact coincides with all the crazy offer activity we’ve grown used to, while riding the wave of the longest running, highest appreciating super-low inventory “seller’s market” anyone has ever seen.
The distress inventory of the Great Recession didn’t settle back down into the “Goldilocks Zone” (not too little, not too much) of 4-6 months supply until after 2011. Then, in late 2012, the listing inventory slipped into the territory of a seller’s market where it has remained but even more so as the supply has dwindled lower and lower until finally dipping below one month at the end of last year.

See the accompanying charts that show the consistent drop in inventory since 2012, as well as a breakdown of the other key indicators that inevitably went up (average and median prices and price per sq ft) as inventory has ratcheted down. The only other significant aspect of the market that has dropped (along with the supply) is the average number of days homes are on the market. Remarkably, the number of actual sales has stayed relatively consistent since 2012.