Drop in homes for sale is strengthening prices in many spots

— -- The nation has fewer homes for sale, and that's helping prices in markets where low supplies are meeting strong demand.

The U.S. had 2.37 million existing homes for sale at the end of March. That was down 22% from a year ago and 41% from the peak in mid-2007, the National Association of Realtors reported Wednesday.

First-quarter home sales, meanwhile, were up 5.3% from a year ago.

The combination of improving sales — coming off one of the worst years ever for home sales — and declining inventories is helping prices.

NAR says median existing single-family home prices rose in 74 of 146 U.S. markets in the first quarter, while they fell in 72 areas. In last year's fourth quarter, 29 markets showed gains from a year earlier.

"Given the steadily dwindling supply of inventory and notably higher listing prices … prices are expected to show further improvements," says Lawrence Yun, NAR chief economist.

At current levels, the housing inventory is at a more "normal" level, says CoreLogic economist Sam Khater. If home prices aren't already at the bottom, "We're not far away," he says.

Home price data from CoreLogic and Zillow both show prices up slightly in March from February. Meanwhile, Fiserv Case-Shiller predicts home prices will stabilize this summer and post a 0.8% drop for the year.

As prices rise, after six years of declines, sellers who have kept homes off the market will increasingly put them on, says Jed Kolko, Trulia economist.

"But buyers will come out, too," says Stan Humphries, Zillow economist.

The broad trend is for home sales to be 5% to 10% above last year, he says.

Some markets are already seeing tight supplies fuel price gains.

In Phoenix, the supply of homes for sale in March was down 64% from a year earlier, says Michael Orr, real estate expert at Arizona State University.

Home inventories in Phoenix peaked in late 2010 and began to fall. Now, prices for homes under $500,000 are rising and "there's no sign of it stopping, because supplies are so are tight," Orr says.

Yun says NAR has noticed "broad shortages of lower-priced homes," most notably in Phoenix; suburban Washington, D.C.; Orange County, Calif.; Naples, Fla.; Seattle; and North Dakota.

Foreclosures may rise following the recent $25 billion foreclosure settlement between mortgage servicers and federal and state officials. But the number of foreclosed homes for sale isn't likely to swamp markets due to increased efforts to modify home loans or allow short sales, Khater says.