The trade group said that sales of already existing houses fell a bigger-than-expected 5.3% in January, but buried within that report was one bit of data that may indicate the death-spiral in the U.S. housing market is nearing a bottom.

The indicator: The supply of housing declined again in January, continuing a trend that started during the summer.

“We’ll have to see if that trend continues. Inventory is already down sharply in the new home market, and if the existing home market can follow suit, it will eventually help stabilize housing,” Mike Larson, an analyst at Weiss Research Inc., told the Dow Jones News Service.

The U.S. housing market will play a key role – if not the key role – in the country’s economic recovery. A house is typically the single-biggest investment that most consumers make, which is why a house is also the typical consumer’s single-biggest expense.

Bursting Bubble, Growing Trouble

A housing bubble – burst by the subprime mortgage crisis – shoved the U.S. into a recession, and helped drag other key world economies along with it.

For housing prices to stabilize, supply and demand have to reach a balance, or equilibrium point. Right now, there’s still an estimated oversupply of roughly 1 million houses on the market. But the supply of available houses has now declined for several consecutive months.

So when sales also stabilize, there will be fewer houses available to purchase, which will cause housing prices to solidify and hasten the pace of a turnaround in both the housing market, and the overall economy, analysts say.

The number of existing homes for sale on the market decreased to 3.6 million in January, down from 3.68 million in December. At the current sales rate, it will take an estimated 9.6 months to sell down 3.6 million homes, the NAR report said.

In January 2008, there were 3.54 million homes for sale. The inventory peak was reached in July of last year.

“The drop in total inventory is an encouraging sign because the number of homes on the market has declined steadily since peaking in July 2008, and inventory is at the lowest level in two years,” Lawrence Yun, the NAR’s chief economist, said in a statement.

Dan Greenhaus, an equity-strategy-group analyst with Miller Tabak & Co. LLC., said that the “supply [and] demand fundamentals are working themselves out.”

But that market equilibrium has yet to be reached and, until it does, expect existing home prices to continue their fall. The national median existing-home price was $170,300 in January, down nearly 15% from last year when the median price was $199,800.

Source:  The One Trend That Hints at Housing’s Recovery