The inventory decline observation is a valid point: it could (obviously) be construed as bullish. What’s the counterargument? Some above have alluded to it.
Inventory is declining because the MIX of inventory changed over the past six months. That is, normal sellers withdrew homes from the market and were replaced with REO’s. These REO’s are, almost by definition, high-velocity sellers. So the impacts should be 1) a decline in market times; 2) falling inventory; and 3) an acceleration in price declines.
The question is, what happens when inventory falls? Do prices stabilize? I would argue no for two reasons. First, falling prices beget more foreclosures, which beget more inventory. We have not seen this because the banks are just now trying to move through the accumulated backlog of NTS of the past three to six months. Until they do so, they will be reluctant to place the newer REO’s on the market.
Second, its likely that a good percentage of REO sales become resale inventory in a few months — because they are sold to REO investors. What’s caused market time to decrease for REO’s is a change in bank policy towards giving REO investors a good deal, i.e. a return based on a flip to current market prices. So we’ll see the inventory come back on, and the potential effect on prices is obvious.
All this is based on logic and some anecdotal evidence. If anyone has evidence to the contrary (i.e. real FTB’s are the ones buying up the vast majority of REO’s), I’d love to hear from you.
