THE SUPPLY OF EXISTING HOMES FOR sale in Orange County, Calif., jumped to 7.5 months in July, up from just 1.2 months a year earlier. That one of the hottest housing markets in the country experienced such a striking turn caught industry watchers' attention. Could this be the start of the long-predicted slowdown?

Yes and no, say experts. In a few markets, some economists and other housing professionals think a welcome cooling period may be under way after a prolonged fever pitch. And while it's true that national measures of inventories have begun to tick upward, they remain near historical lows. In short, there's no need to worry.

“We are not going to hell in a handbasket,” quips John Burns, whose Irvine, Calif.–based real estate consulting firm conducts market research for home builders. Increasing inventories have caught people's attention, Burns says, because many markets have gone so long with nearly no standing inventory at all. This is the first time since 1997 or 1998 that Southern California has seen a housing surplus, he adds.

California's average supply of existing homes since 1988 has been 7.5 months, says Leslie Appleton-Young, chief economist for the California Association of Realtors. In the doldrums of the early 1990s, that figure soared as high as 17.5 months—making the current statewide average of 3.3 months pale by comparison.

Appleton-Young points to the state's improving economy as one reason she continues to believe in a strong California housing market. She does, however, think the state's less frenetic pace of home sales marks a trend. “We've had such aggressive price appreciation that it's causing a bit of a push back,” she says. “Buyers are recognizing that they have more to choose from. Rates are still positive. They can take their time.”

Across the board, Burns believes some of the fundamental pieces that affect inventories have changed. Lenders and Wall Street analysts have frowned on speculative building enough that builders largely have shied away from the practice. “More than anything,” Burns says, “that's why we'll never see new-home inventories above a six- or seven-month supply again.”

They may not shoot sky-high, but don't be surprised if those numbers continue their ascent. Economists maintain their forecasts that mortgage rates will rise by the end of the year and into 2005, and they expect rising rates to lower sales volumes in many markets. “The demand for housing can slow quickly, and that's going to drive the inventory number up,” says Celia Chen, director of housing economics for Economy.com.

Learn more about markets featured in this article: Los Angeles, CA.