I think there are more people worried about "the market" right now than ever before, and I think there are less people then ever before who know where the market is headed. I've read articles and listened to interviews from just about every expert in the field, and 10 different people are giving 10 different opinions. I've also done my own research and analysis, and right now the data is very difficult to read.
I've been writing for the last month or two that it "feels" like there is a stalemate right now between buyers and sellers. Buyers have been watching prices fall and days on the market rise, and they're demanding lower prices. Sellers are drawing the line, saying they've lowered their prices enough and they won't go any further. That said, we’ve felt an upswing in general activity levels over the last month or so. 2007 (and probably 2008) will probably be defined by who blinks first.
If Buyers blink first, prices are going to stay relatively stable, and our inventory will begin to slowly shrink as more homes are sold. It becomes a self-sustaining process; more homes having sold means less overall supply, which helps to firm up prices and shorten time on the market.
If Sellers blink first, price are going to fall further before the market stabilizes. Let's say, hypothetically, prices fall another 10% from where they are today - would that be a bad thing? Well, people who are trying to sell their homes today will say yes. And people who bought their homes in 2005 and 2006 will say yes. But for the market as a whole? Well, it actually could be a good thing.. If prices were to fall, many buyers would feel comfortable "taking the plunge". Other buyers would be able to afford a home they really like, but which is currently priced a little bit out of their range. Local “movers” wouldn't be affected too much, as they would lose on their sale and gain on their purchase. While other sellers might decide not to sell after all, and to just stay put for awhile.
This two punch combination of increasing buyers and decreasing sellers would go a long ways towards stabilizing our market. After all, this is one of the greatest examples of free market economics - completely driven by supply and demand. Personally, I think this second scenario is closer to the truth. We saw the market slow down in late 2005 and early 2006. Then, once everyone realized how slow the market was, we saw prices start to free-fall 10-15% from their highs of summer 2005. The last few months have seen some price stabilization, but there hasn't been a noticeable increase in sales or a reduction in inventory. In fact, inventory levels are very similar to where they were in October, and they're rising. It's as if the market took a few months to catch its breath. It wouldn't surprise me to see prices start falling again as some sellers attempt to entice buyers.
One thing most experts tend to agree on is that there will be an inverse correlation between the severity and the length of the pain. A hard correction will not last long, while a gentle depletion of inventory will take much longer. So, do you prefer to rip your band-aid off, or pull it slowly?
Here's a terrific article from BusinessWeek.com on this topic. Even better than the article are all the comments posted by readers - lots of food for thought.