Housing Inventory as a Market Indicator

One common way to measure housing supply is "Months of Inventory" - a calculation of how long it would take to sell all the homes on the market if no new ones were added. A high number indicates over-supply, and downward price pressure - since buyers have many homes to choose from. A lower number indicates under-supply, and a so-called seller's market - buyers competing for a scarce commodity.

Interpreting these numbers is as much an art as a science, but here are some suggested parameters from Steve Thomas of Altera in Orange County:

Buyer's Market - 6 or more months of inventory
Equilibrium - 5 to 6 months of inventory
Seller's Market - 2 to 5 months of inventory
Hot Seller's Market - less than 2 months of inventory

In February through August of 2005, there was less than a 2 month supply of homes on the market in Orange County - right before the bubble burst. As troubles in the sub-prime mortgage market grew, housing inventory also grew - to almost 8 months supply in January of 2007, and then and incredible 16 months of inventory in September of 2007! Since that month, inventory has fallen dramatically and leveled off to between 4 and 5 months supply, where it currently stands.

It is impossible to predict where the bottom of any bear market will be, but this is yet another indication that the housing market in Orange County is settling down into a less volatile state.