A new development is catching home buyers off guard as the spring sales season gets under way: Bidding wars are back.  SO… Is now the time to buy a home?

From California to Florida, many buyers are increasingly competing for the same house. Unlike the bidding wars that typified the go-go years and largely reflected surging sales… todays are a result of supply shortages.

Inventory levels in many markets are at the lowest level in years. At the current pace of sales, it would take just 1.5 months to sell all the homes listed in Sacramento, Calif., and 2.4 months to sell all the homes listed in Phoenix. San Francisco and Washington, D.C., each have 3.4 months of supply, while Miami has 4 months of supply.

Competitive bidding in the current environment isn’t producing huge price increases or leaving sellers with hefty profits, as occurred during the housing boom. Still, the bidding wars caused by tight inventory provide the latest evidence that housing demand is starting to pick up after a six-year-long slump.

An index that measures the number of contracts signed to purchase previously owned homes rose in March to its highest level in nearly two years, up 12.8% from a year ago and 4.1% from February, the National Association of Realtors reported on Thursday.

Many experts are saying that maybe we have hit or are very close to the bottom, however no one know for sure. The average home-price forecast for the year, calls for a 1% annual gain, up from a 1% decline.

The Wall Street Journal’s quarterly survey found that the inventory of homes listed for sale declined sharply in all 28 markets tracked. Real-estate agents consider a market balanced when there is a six-month supply of homes for sale. At the height of the housing crisis, in 2008, there was an 11.1-months’ supply. In March, there was a 6.3-months’ supply.

Other markets have plenty of homes. Chicago, for example, has 9.4 months of supply, while New York’s Long Island has 16.1 months of supply. Even in those markets, the number of houses for sale is edging down.

Increased competition is frustrating buyers and their agents since they are writing a record number of offers, but we’re not seeing a record number of closings and that’s because it’s so competitive.

Inventories are declining for a number of reasons. Some sellers, unwilling to accept prices that are still down from their peak by one-third, are taking their homes off the market in anticipation of higher prices down the road. Meanwhile, investors have been outmaneuvering consumers for the best properties, often making cash offers that are quickly accepted by sellers.

In addition, some economists say that inventory levels are being held artificially low because Fannie Mae, Freddie Mac and the nation’s biggest banks have been slow to list for sale hundreds of thousands of foreclosed homes they currently own. The lenders slowed down foreclosure sales and repossessions after record-keeping abuses surfaced 18 months ago.

Banks and other mortgage investors owned nearly 450,000 foreclosed properties at the end of March, and another two million mortgages were in some stage of foreclosure.

It is expected that the banks will step up their efforts to sell these homes soon… the question is whether they do so in an organized manner which will hold prices or dump them all at once which could put more downward pressure on prices.

Also, with the possible expiration of the Mortgage Forgiveness Debt  Relief Act on December 31, 2012, more homeowners may consider short sales as loan modification approvals are denied.

The declining inventory of older homes is spurring sales of new homes. New home sales are up 16% so far this year, compared with a year ago, while inventories of new homes fell in March to their lowest level since record keeping began in 1963.

Even though bidding wars are pushing prices higher, many homes are still selling for prices far lower than a few years ago. Increased demand is entirely affordability driven, which says there will be strong resistance to price increases.

Rents are rising at a time when mortgage rates have fallen to very low levels. The result is that the monthly mortgage payment on a median-priced home is lower than any time since the 1990s. Freddie Mac reported on Thursday that mortgage rates fell to 3.88% for the average 30-year fixed rate mortgage, near its lowest recorded level.

Housing markets face other headwinds. More than 11 million homeowners owe more than their home is worth. It is a big reason that the “trade-up” market has been stalled. These homeowners can’t sell their current homes, let alone come up with the down payment for their next home.

Mortgage-lending standards remain tough. Real-estate agents say an unusually high share of deals are falling apart because homes won’t appraise at the price that buyers have agreed to pay sellers.

Still, borrowers with stable jobs are looking to make deals. The difference is that the deals of the past few years, especially for homes that are in good shape, may not be there. If a buyer really wants a home, the new strategy is that the buyer has to make offers quickly at or close to asking price since there will be other buyers to deal with.

Excerpted from
Peter Earl McCollough at The Wall Street Journal