While I'm in general agreement with most of what West has to say, I'd hesitate to draw any conclusions from the end-of-December inventory levels. Here's West on the topic:
Inventories of homes for sale have been declining over the last couple of years, ending 2011 at 350. This was 21% fewer homes than were on the market at the end of 2010 and 27% fewer than at the end of 2009. This equates to an 8 month supply of homes in December, which is an improvement over both 2009 and 2010. (Months supply means how many months it would take to sell all the homes currently on the market, at the current rate of sale). In early 2009 the months supply of inventory reached as high as 32 months. The current 8 months supply is very close to a balanced market (6-7 months), which means neither a seller’s nor a buyer’s market.
It's not uncommon for North Shore home sellers to withdraw their homes from the market over the holiday season and relist them early in the spring market. A number of home sellers also delay bringing their homes to market until after the holidays, sometimes on the advice of their Realtors. The result: year-end numbers don't give an accurate read on the state of the for-sale housing inventory. The same is true of the bloated inventory numbers during the spring selling season.
A more accurate read would require that the inventory numbers be seasonally adjusted, but that would require statistical expertise beyond the capabilities of most Realtors and the crude market analysis tools available to them. In their current state, the numbers are meaningless.