Updating our long-running chart of existing home inventories, we see a sharp drop in December. The chart below shows 2007 and 2008. You can see that monthly inventory drops in the past have been temporary, and not the beginning of a new trend. Hopefully this can change going forward.

In order for the economy, our financial system, and the markets to produce real, sustainable stability we need the housing market to halt the price declines. Stable home prices require a reasonable supply-demand balance. The median existing home price in December fell to $175,000 from $207,000 the year before. That price decline brought out some buyers, which reduced inventory to the lowest levels since mid 2007.

Price declines will continue for some time, but if we can get inventories down to 6-7 months supply, those price declines should begin to moderate. A stable housing market would do a lot to support stable prices for mortgage-backed securities, which in turn would ease the pressure on bank balance sheets and boost confidence in our financial system. As a result, we should cross our fingers that the December inventory decline continues in coming months.