Housing inventory in decline

Everyone knows the old supply and demand curve. As demand goes up and supply goes down and prices usually increase. Clearly there are numerous factors that have influence over this rather simple economic model. All things considered, when you have more buyers than sellers, prices rise.

If you look at supply curve of real estate inventory over the past decade, you quickly notice that the supply curve went way up for the past 6 years. The climb began in 2004 and peeked in the middle 2006. From there, the supply curve to real estate for sale has had an erratic, but slow downturn. This supply curve would indicate that inventory levels in real estate have returned to normal. This is a great indicator of health in the housing market.

There are reports that banks are holding a lot of foreclosure inventory off the market. By holding back inventory, they stabilize supply curve of the housing market and preserve home values. This bank owned inventory is called Shadow inventory.

In any case, the good news for home sellers is that low inventory puts upward pressure on home values. This is also a clear signal to potential buyers – buy now or pay more later.