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Some cities are experiencing a seller’s market

A sign advertises a pending residential real estate

A sign advertises a pending residential real estate sale in Framingham, Mass. (April 26, 2012) Credit: AP

More and more, we're hearing rumblings not only that the housing market is improving but that it's become a seller's market.

Homes are being sold within weeks of being put on the market. Sellers are entertaining offers from multiple bidders. Prices are being driven higher.

It's true, this phenomenon is happening in some cities, and it's largely being fueled by the decline in the number of homes for sale. Fewer homes on the market can mean more demand for the ones that are.

Still, we think it's too early to get excited about a turnaround just a few months removed from the housing market's latest bottom, which is why, if you're a buyer or a seller, you need to find out a few things about your market before acting.

Ask questions like these: How many homes are for sale, how long does it take to sell them and what's happening to sale prices?

Answering these questions correctly can help you find the right price.

In many big cities, the number of for-sale homes has collapsed, down 25% to 50% from 2011.

However, a decline in homes for sale doesn't necessarily mean it's a seller's market.

A good rule of thumb: Anything less than a 5- to 7-month housing supply (defined as the amount of time it would take to sell all the existing for-sale homes) is one indication of a seller's market.

Orlando's decline has led to a 3.22-month housing supply, the lowest since 2005, Realtor Jennifer De Vivo says. And the Washington, D.C., area has about 2 months' worth of housing available, says Realtor Katie Wethman with Keller Williams.

But Nashville real estate agent Gary Ashton says it’s still a buyer’s market in Tennessee, despite real estate data showing there are 19% fewer homes for sale this year.

Nationally, there's a 6.3-month housing supply, the latest National Association of Realtors data show. That's right on the edge of what's considered a seller's market.

There are several reasons why homes for sale are on the decline:

1. Fewer foreclosures have reached the market, says Rick Sharga, executive vice president of Connecticut-based Carrington Mortgage Holdings. There are a lot of explanations for this, from banks deliberately slowing the pace (to keep housing prices from declining further) to government regulations and an overwhelmed court system holding down the number of completed foreclosures. An increase in both home loan modifications and short sales also has been credited for the slowdown. It's unclear when, or if, a new glut of foreclosed homes will hit the market.

2. Home prices haven’t recovered, meaning sellers either can’t list because they owe more on their mortgages than their homes are worth, or they don’t want to list because they’re waiting for higher prices, according to Sharga.

3. Tighter lending standards also are keeping sellers out of the market. Many people could not qualify for a new mortgage if they sold their homes, says Jim Lowenstern, broker/owner of Castles Unlimited in Newton, Mass.

All of these reasons why there aren't more homes for sale also play into demand and pricing. Fewer foreclosures could drive up prices, but tougher lending standards could depress demand, keeping prices down.

As with housing supply, housing prices largely depend on where you live. But it appears prices are increasing slightly in many markets.

One of the leading measurements of home prices suggests we have, for the moment, begun a housing recovery. The latest S&P/Case-Shiller 20-city composite index showed the first year-over-year increase since September 2010.

The market appears to have reached its bottom earlier this year, but prices are still off more than a third from their peak, meaning even if prices are up slightly, it's still a great time to buy.

So what should you do if you’re thinking about buying?

Mortgage rates are a key consideration. Regardless of which direction home prices are headed, record-low interest rates can give you a comfortable monthly house payment as long as you buy only what you can afford.

Wethman says potential buyers should ask themselves three questions:

Question 1. Do I believe the market is stable or appreciating based on my own analysis?

Question 2. Do I have the financial resources to cover a down payment, closing costs and monthly payment?

Question 3. Are my job and life situation stable for the next four to five years such that I could stay in this property that length of time if I needed to?

If the answer to those questions is yes, start looking, she says.

If you're looking in a market where supply is low and prices are on the rise, be careful how you approach making an offer.

And if you find yourself in a bidding war, beware — the common tactics for gaining an edge in multiple-offer situations often backfire.

Waiving the financing contingency is a bad idea in today’s tight lending climate. Finding out that you can’t get a loan after having such an offer accepted means losing thousands of dollars in earnest money.

"Buyers need to be cautious that they are not overreacting," says Roxanne Korostowski, director of relocation operations for Delaware-based XONEX Relocation. "They should obtain a home inspection and a mortgage appraisal and have their offer contingent on both. If the home does not appraise at what the home seller is asking, a potential buyer cannot obtain a mortgage."

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