US home prices are inching up as an ebbing tide of foreclosures creates a shortage of properties at a time of pent-up demand, but do not expect the housing market recovery to shift into higher gear.

Home re sales declined 5.4 per cent in June, with real estate agents blaming the drop on lack of inventory

Tightening house supplies have turned some parts of the country into sellers’ markets, marked by intense bidding wars among buyers eager to take advantage of rock-bottom mortgage rates and still-low home prices.

“It is encouraging that demand is flowing back into the market and buyers are getting off the fence at last,” Stan Humphries, chief economist at real estate group Zillow told Reuters.

But it’s not off to the races for the housing market, the main trigger of the 2007-09 recession. Many homeowners remain saddled with properties worth less than the amount they owe banks and other financial institutions.

This means they cannot afford to sell their houses, even if they wanted to. As such, the supply of houses on the market will remain tight and weigh on sales.

Home resales declined 5.4 per cent in June, with real estate agents blaming the drop on lack of inventory.

Contracts to buy homes, a forward-looking indicator of sales, also fell during the month for the same reason, casting a shadow on the budding housing market recovery.

“There is plenty of demand out there, but not much supply. What we need is increased sales volumes, not just stable prices. That’s what the economy needs,” said Glenn Kelman, chief executive officer at real estate group Redfin.

“Right now I don’t think there is going to be a massive increase in sales volumes.”

Part of the increase in demand reflects a modestly improving economy, especially the jobs market, which is encouraging some adult children to move out of their parents’ basements. High rental rates also are making homeownership attractive.

In June there were about 2.39 million previously owned homes on the market, down from a peak of 4.04 million in July 2007, according to the National Association of Realtors.

The figure does not include new homes, where inventory is near record lows.

In a short space of time, foreclosed properties have gone from a deluge to a trickle, creating an imbalance between supply and demand in the market that is squeezing prices up.

Analysts partly attribute the ebb in foreclosures to tough regulations in some states in the wake of the “robo-signing” scandal in 2011, when it emerged that some bank employees were signing reams of foreclosure documents without properly reviewing individual cases.

Lenders are also aggressively pursuing alternatives to foreclosures, such as loan modifications. The steepest declines in housing inventories have been in Phoenix, San Francisco, Los Angeles, Minneapolis, and Miami.

Riverside in California has also seen a decline in supply.

“These markets have seen demand pick up, pulling inventory off the market. Normally that would bring sellers off the fence and into the market. In some of these markets, negative equity is playing a big role in constraining supply,” said Humphries.

“Even though there is demand out there and the seller wants to sell, if the value of their home is less than the mortgage, then they are unable to put their home on the market.”

According to the Commerce Department there were 1.6 million vacant housing units for sale in the second quarter, down from two million units in the same period last year. That constituted 1.2 per cent of the nation’s total 132.72 million housing units.

The number of units held off the market rose to 7.61 million from 7.35 million in the second quarter of 2011. That accounted for 5.7 per cent of the total housing stock.

With foreclosures waning, house prices across the country are stabilising and rising in some cities, causing some prospective sellers to hold onto their properties.

Average home prices rose 2.2 per cent in May from April in the 20 cities tracked by Standard & Poor’s/Case-Shiller. They were down only 0.7 per cent from a year ago.

“If you think we are at the bottom of the market, you wouldn’t want to sell, you would want to wait until prices recover a little bit,” said Redfin’s Kelman.

“The only folks who are selling right now are the folks who have to, you don’t see many opportunistic sellers. “