This one is relatively self-explanatory. It measures the number of properties for sale in a given real estate market. This number will inherently fluctuate seasonally (more homes on the market in spring and summer, fewer in the fall and winter).
This is basic supply and demand. If inventory is on the rise, buyers will have more options and therefore sellers may become more flexible on their price. If the inventory of homes on the market drops, you may see prices rise and Average Days on Market decline. Make sure you keep an eye on the Market Action Index to gauge demand levels relative to inventory levels. If inventory increases as demand falls, you'll see the Market Action Index drop quickly.