May proved to be mostly a month where the numbers went sideways.

Whether you're looking at Culpeper, Fauquier, Prince William or Rappahannock County, there are no dramatic changes.

There were some subtle signals that things have slowed down a tad in Culpeper county. Both new contracts and sales actually fell last month.

In Fauquier county inventory actually rose, ever so slightly (3 houses). But sales jumped month over month from 54 to 70, well above last year's pace at this time.

Prince William continued to shed inventory with only 3.7 months of inventory now available. I continue to see buyers discouraged with what they're finding available under $400K in Prince William.

Rappahannock County had the biggest jump in sales with 7 units selling last month. This being Rappahannock and the universe being so small, it appears to be a big jump (SALES TRIPLED!). But inventory is exactly where it was a month ago and we're unlikely to see any sudden movements in this quiet corner of the market.

Overall, signs would still seem to indicate we're at or very close to a bottom. Prince William still looks to be on its way back up with price appreciation. And, with a tiny amount of inventory available, prices there will likely continue to rise throughout the summer months.

In the tough seller's market of the last few years a lot of sellers have tested the waters by putting their house up for sale, and, in the end, retreated. All those houses that will theoretically come back on the market when the market improves are called shadow inventory.

We're looking at two basic kinds of shadow inventory. The first is individual owners. They want to sell, maybe even already tried and are just waiting for the right moment to put their home on the market.

The second kind of shadow inventory is foreclosure inventory. The banks are reportedly sitting on 600,000 homes nationwide that they've already foreclosed on, but aren't yet putting on the market.

Both of these categories have the potential to dramatically increase inventory, which has been steadily dropping for at least a year now.

The thing is, I'm not overly worried and I think the danger has been exaggerated.

Yes, there are a lot of homeowners who still want to sell. But it's not just the low number of sales that keep them from trying. They also don't want to sell at these prices. And, if they're going to wait for prices to recover even a quarter of what they've lost, I think they're looking at waiting several years. Some of those homeowners will have changed their mind by then. They'll remodel the house to suit their needs and they'll stay. Those that do still sell will not do so in one huge mass. Some will have a higher tolerance for lower prices and will sell sooner. Others will likely wait a year or two or three. I don't believe there will be some magical month where all this "shadow" inventory pops onto the market at once.

The foreclosure properties are a bigger concern. But I'm still not convinced it will be a huge problem. A lot of those 600,000 homes will be in CA, FL, NV and MI, places hit harder than we were. So, the numbers will likely be smaller than people anticipate. Secondly, the bulk of these are likely to be at the lower price ranges. We've actually got a shortage of inventory at those price levels. In places like Prince William County and even Culpeper County, a lot of inventory would be absorbed very quickly by first time buyers. And, I believe the banks are deliberate spreading out the foreclosures in order to manage their losses. It's not in their interests to dump everything on the market at once.

So when someone tries to scare you with all the shadow inventory waiting to hit the market, take it with a grain of salt. It may not be all that bad!

The economic analysts have been talking a lot lately about deflation and the dangers it poses for our economy. I'd like to suggest we've been seeing deflation at work in the real estate market for a long time.

Deflation is when prices decrease. Economists are currently worried about a deflationary spiral where prices continue to decrease, consumers, knowing prices will decrease, wait for a better price, and so those with goods to sell are forced to discount their prices in an ever deepening loop. Of course, as goods are sold for less, the people who make those goods must decrease their costs, lay off people and creating more deflationary pressure.

We seem to be in this cycle in real estate and have been for some time. Buyers are waiting to see how much more home prices are going to drop. After all, no one wants to get a bad deal on one of the largest financial transactions they'll ever make!

And, so, sellers are forced to continue to drop prices. That reinforces buyers opinion that they should wait as prices are still dropping.

But, of course, ultimately this path leads to ruin, whether you're talking about real estate or the overall economy. If real estate assets continue to plummet in value, all of us are poorer. Even if you're not selling your house, you're impacted. Local governments are impacted as tax revenues fall. If you've got kids you know the schools are impacted.

So, how do deflationary spirals end? The problem is no one seems to have a good answer for that. Wars have ended them as the government created massive spending and hiring programs, as in World War II. Japan's tried everything you can imagine to end their deflation problem, without all that much luck.

President-elect Obama is about to get his crack at it. Let me say that one reason we're here is that we've had a government who did not believe that a deflationary spiral in real estate was possible. And, when they did, belatedly wake up, they still didn't believe that the effects of that would spill over into the rest of the economy.

The good news is that I believe that even the government now gets it. In one way or another I believe addressing this problem will be one of the first priorities for the new administration. I've got my fingers crossed that they get it right!

As I continue to hit my head against the wall, the wall now known as banks, it's good to see it's not just me! Another blogger tells a story of the frustration out there.

And, in a related development, apparently an asset manager for a major bank was on a news program this week saying that the banks are deliberately slowing things down. This gentleman said that the purpose of doing this was to spread out the losses over time so that their numbers don't look as bad.

Well, it's the first rational explanation I've heard for the banks behavior. But I'd argue that it's only rational on its surfact. As soon as you begin to think about this a little more deeply you have to question that strategy.

Pricing will not, can not, recover until the foreclosure and short sale inventory gets cleared out. The longer that takes, the more prices fall. So, the properties that the bank moves to the back of their list will simply be worth a whole lot less, thus increasing their losses. Yes, they may be more spread out, but if the bottom line impact is worse, what have they gained?

Clearly I don't think like a banker!