Forget what the Realtors call "inventory." Forget short-sales, bank-owned, and upside-down. The best measure of the housing market is how many units are empty.
A normal market has vacancy. Someone moves out of a house, and the next owner won't move in for a couple of weeks. Or a tenant moves out of an apartment, and the next tenant won't move in for a while. Apartments normally have a high vacancy, single family homes a low vacancy.
We made a lot of progress for a few years, but vacancy has leveled out a little higher than normal. Maybe not too much above normal to call this an average market. (Vacancy rates should average a little higher when interest rates are low, as they are now. It's the cost-of-inventory calculation that business students learn.)
Looking forward, I expect these vacancy rates to edge down a little further, more from increased population growth and household formation than from weak new construction.