Inventory is a leading indicator (future sales), while appreciation is a lagging indicator (last month’s sales compared against last year’s sales). When the market accelerates, inventory will drop while appreciation remains constant, seemingly defying the law of supply and demand. Likewise, when the market slows, inventory rises first, and price declines happen much later.

In addition to this technical subtlety, you also have to consider the psychological effect during market inflection points. Even when the general market turns, there will be a few misguided optimists who believe the market will boom forever. So while the general market has stopped buying (rising inventory), the few remaining optimists will continue to buy at inflated prices, believing this to be a great opportunity for increasing their holdings. This also contributes to the seemingly contradictory situation of rising inventory with positive appreciation.

Look at the history of the markets which are now beginning to experience the first price declines (DC, Miami, San Diego, etc.) They all experienced several months of booming inventory with high appreciation, then booming inventory with no appreciation, before beginning the first price declines. There is nothing mysterious happening in the Portland RE market; we’re just one or two years behind some of the other markets.

“The truth is that the official numbers on house prices — the last refuge of soothing information about the real estate market on the coasts — are deeply misleading. Depending on which set you look at, you’ll see that prices have either continued to rise, albeit modestly, or have fallen slightly over the last year. But the statistics have a number of flaws, perhaps the biggest being that they are based only on homes that have actually sold. The numbers overlook all those homes that have been languishing on the market for months, getting only offers that their owners have not been willing to accept.”