An excerpt from our friend Rich Toscano at the VOSD – click here for full article and multiple graphs:

It’s clear that there has been a good correlation between months of inventory and home price changes. 

In addition to the directional similarities, there appears to have been a dividing line of about 6 months’ worth of inventory (the thick black line) which has tended to separate periods of price increases from those of price decreases.

Now, though, inventory has dropped even lower (gone higher on the inverted chart), and these factors may not be enough to keep prices in the doldrums. 

The estimate for February’s Case-Shiller index (assuming it turns out to be right — it is calculated based on the past three months’ median price per square foot change) suggests that prices may have stopped declining at least for last month.

It’s worth noting that prior to the current period, prices have always been rising, and usually pretty fast, when inventory was at or below 4 months.  Foreclosures and high unemployment were a big issue for most of that period, too.

Inventory levels, as measured by the ratio between current supply and demand, say nothing about the longer-term prospects for housing, nor about exogenous factors that could come into play and change that ratio (the possibility of sharply interest mortgage rates is my favorite one to talk about).  But the level of inventory can provide clues about price pressures in the months ahead.  Should the rather dramatic tightness in supply persist, the near-term pressure for home prices could be to the upside.

http://www.voiceofsandiego.org/toscano/article_7c5be418-6fa6-11e1-b46c-001871e3ce6c.html