by Calculated Risk on 6/06/2012 03:30:00 PM

Yesterday I asked "Dude, Where's my inventory?"

In the comments, 'TJ and The Bear' wrote: "My take is that when there's an expectation of rising prices buyers are motivated but sellers are not."

Exactly! This is something I mentioned earlier this year. And it doesn't even take rising prices to change the dynamics.

When the expectation is that prices will fall further, marginal sellers will try to sell their homes immediately. And marginal buyers will decide to wait for a lower price. This leads to more inventory on the market.

But when the expectation is that prices are stabilizing (the current situation), sellers will wait until it is convenient to sell. And buyers will start feeling a little more confident. Also, as prices stabilize, private lenders will start thinking about entering the mortgage market (something we are starting to see).

So expectations matter. And so do price fundamentals. Since we are close to normal prices, based on real prices (inflation adjusted) and the price-to-rent ratio, I think expectations of price stabilization have now taken over, and buyers, sellers and lenders are acting accordingly - and that is a key reason inventory has fallen sharply.

There are other reasons for the decline in inventory, but price expectations are probably a key factor.