A reader recently asked me why I have not updated my housing inventory chart lately (it has been about a year since my last periodic update) and the simple reason is that I forgot. As you can see after I added the last 12 months or so of data, the U.S. housing market was unable to continue drawing down inventory during 2010. Months of supply have risen again despite price stability in most markets.
What this tells me is that we have many more months (and probably years) to go before inventories get worked down enough to see meaningful price appreciation in the housing market. Now, this does not mean that prices will be taking another large leg down in coming months. Ratios of incomes and home prices are now much more realistic so there will be buyers eager to step up when deals present themselves. I would expect several more years of a relatively flat housing market (I am talking about the national market — any individual area always has its own supply-demand dynamic). Long term buyers will likely be shielded from material downside risk in all but the most overbuilt markets, but they will truly have to be long-term thinkers when counting on equity appreciation above and beyond their principal repayments. As a result, there is little need to hurry into the home builder stocks. There will be a turn there at some point, but it is likely a ways off.