Are lower inventory levels leading to fewer home sales?

After showing a house to some buyer clients yesterday, we were reflecting on the fact that there don't seem to be too many options on the market in the price range that they are considering with the characteristics that they are seeking in a home.  We wondered aloud as to why it might be that we can't find them a home right now --- yet at the same time, sellers are wondering why they can't find a buyer for their home right now.

Here's what I think is going on.....

If this is what is occurring (generally speaking), it begs the question of how we break out of this cycle.  One suggestion is that perhaps more potential sellers ought to consider putting their homes on the market if they can offer a product and price combination that would be compelling in the current market.
 
What are your thoughts?  Does this accurately portray one dynamic of the current local real estate market?