Housing inventories continue to fall

The latest data from ZipRealty shows that (subscription required) the supply of homes on the market fell 3.9% over the previous month in 28 major metropolitan areas--- and experts say that there is no historical trend suggesting that a decline in inventories from April to May is normal.

Interestingly, the inventory declines are strongest in some of the areas hardest hit by the housing bust: Phoenix, Arizona was down 15.9%, Las Vegas fell 15.1% and LA fell 13%. Over the past year, the numbers are even more impressive: Inventories for those 28 major metropolitan areas are down 28%.

This trend, if sustained, makes an excellent argument for a bottoming in home prices: Less supply means more competition among buyers, which should lead to price stability. The question then is whether these falling inventory levels can be sustained: Will the pace of foreclosures speed up as ARMs adjust, prime borrowers join subprime borrowers in foreclosure, and the bad ALT-A loans made at the height of the bubble start to create problems? It's hard to know for sure but it seems likely that most markets have probably already seen the highest inventory levels they'll see during this mess which would seem to suggest that further price declines will be modest.

Of course if interest rates continue to rise and first-time home buyer tax credits are allowed to expire at the end of the year, all bets could be off.

But it's to look at data like this and not be at least a little bit more confident that the end of the housing bust is in sight.