03/22/2013 06:34 pm ET

A Turning Point for Housing

Bullish Conditions for Prices

In economics, price is the ultimate equalizer. Prices rise when something is scarce, and fall when that something is plentiful. Hence, the precipitous drop in home prices and sales as the housing bubble burst in 2007 and 2008. Now, years of underproduction, tight credit market conditions, fewer distressed sales and reluctance by would-be sellers to list their homes for sale have all taken a toll on inventories. What was once an overhang in homes for sale has become a shortage.

In January, the National Association of Realtors reported that the total month's supply of housing had reached the lowest level since April 2005, down to 4.2 months supply; that's down more than 25 percent from a year ago. Raw, unsold inventories, which dipped to 1.74 million, fell to the lowest level since December 1999.

Prices have risen but not enough to persuade owners who are still unsure to get off the fence and list their homes for sale. Home prices are still about 30 percent shy of the 2006 peak, despite recent increases. So, would-be sellers are opting to remodel and eventually recoup those investments by waiting for more substantial increases in home values, instead of realizing their perceived losses by selling now.

Moreover, many of the worst underwater properties have already gone through foreclosure and been sold. This, coupled with a drop in underwater mortgages, has further curtailed the stock of homes for sale.

At a presentation for the National Association for Business Economics (NABE) last week in Washington, Mike Simonsen, CEO of Altos Research, equated the shortfall in housing inventories to a sharp drop in the supply of a key commodity like oil; there is nowhere for prices to go but up, given the shortages. The drop in the number of listings is so acute in the West that it has already constrained sales. Foreclosures, which once lured investors into the market, have been bought while the stock of turnkey properties is so tight that bidding wars have broken out over what is left, at least in some markets.

Add to that, an increase in demand, and it is little surprise that home prices are on the rise. Buyer traffic jumped 40 percent in January compared with one year ago, while the number of properties selling at or above the asking price increased.

Some worry that a bubble may be forming but we still have a long way to go to meet pent up demand, let alone any level considered "normal." Richard DeKaser of Wells Fargo has calculated that housing affordability would remain near record highs, even if mortgage rates rose 2 percent from current levels.

This special report takes a closer look at the outlook for housing in 2013. The stars have come into alignment: The rebound in housing is finally here...

Read all of Themes on the Economy, including this excerpt.