Supply, Demand & Inventory - All Moving Targets

One number batted around a lot to indicate the state of the housing market is the Inventory in months of supply. One source states that there is a 10.6 month supply of homes based on current sales numbers. Of course, that's based on what's been happening in sales, and doesn't mean a lot if sales activity takes a dive or jumps due to rising sentiment, government incentives or easier mortgages.

Jeff Miller, over at Seeking Alpha, states that housing inventory numbers are not reliable for several reasons. His points are well made, and investors should take them into consideration when attempting to read a volatile market. Basically, he is correct in the contention that demand can change quickly for many reasons. With any significant change in demand, the month-supply number would change dramatically as well.

However, the real unknown, and the reason that inventory may be understated considerably is the amount of inventory that is hidden just "away from the market." There is an unknown number of sellers out there who do not have to sell, and they are waiting to list until prices stop falling, or begin to approach levels at which they have always been willing to list. This unknown quantity could be quite large. So, if prices stabilize and begin to show improvement, there could be a flood of new inventory. There's a lot more of interest in Jeff's article.