The absorption rate (number of months to sell existing housing inventory) tells us something about supply and demand.  Studies have shown that a "normal" balanced market should have an absorption rate of about 6 or 7 months.  So where are we now?  Based on statistics from our local MLS which includes 24 towns along the Connecticut shoreline, our absorption rate (residential, single family homes, all price ranges) is a whopping 18 thus far in 2009.  Compare that to the last 4 years, and you can see the problem. 

Absorption Rate (Months to Sell Existing Inventory)

Does that mean that prices are too high?  Does that mean that buyers are waiting on the sidelines?  Does that mean that buyers can't get mortgage loans as easily as before?  Most likely, all of the above.

 Clearly, higher absorption rates mean that the supply of homes is higher than normal which means that either 

(1) home prices need to come down more so that sales will increase and reduce the inventory or

(2) the number of new listings coming on the market needs to be reduced. 

Either way, it's not an easy path to a balanced market.