Matthew and Carina Hensley offered
$10,000 more than the asking price for a three-bedroom house in
suburban Seattle, then lost out to one of seven other bidders.

Their $270,000 proposal last month came with a family
portrait and a letter introducing the couple, their eight-month-
old daughter, Harper, and their desire to build a family in the
Renton, Washington, house with a yard backing onto a woody
hillside.

Bidding wars, absent from most parts of the U.S.
residential market since its peak in 2006, are erupting from
Seattle and Silicon Valley to Miami and Washington, D.C. The
inventory of homes hovers close to a six-year low, while an
increase in jobs and record affordability are tempting more
buyers. The number of contracts to buy previously owned homes
jumped 14 percent in February from a year earlier, the National
Association of Realtors reported yesterday.

“We understand there is going to be fierce competition in
the offers made for your house but Carina and I both felt very
strong about letting you know what it would mean to us if we
were given the opportunity to live in your gorgeous and charming
house,” wrote Matthew Hensley, 33, a credit union branch
manager whose wife is a dental hygienist. Such letters from
eager buyers were common during the housing boom.

While listings will probably rise as banks accelerate
foreclosures and sellers gain confidence in the market, the U.S.
metropolitan areas with the strongest economies may be ready to
absorb the additional inventory, said Mark Zandi, chief
economist for Moody’s Analytics Inc. in West Chester,
Pennsylvania. Low values and interest rates have made buying a
better deal than renting in 98 of the largest 100 metropolitan
areas, according to Trulia Inc.

‘Better Times Ahead’

“The housing crash is finally giving way to recovery in an
increasing number of markets across the country,” Zandi said in
an e-mail. “The decline in unsold listings and vacant homes and
the increase in rents presage better times ahead for single-
family housing.”

The bidding wars seen in such places as Seattle aren’t
found everywhere. In metropolitan areas including Atlanta and
California’s Riverside and San Bernardino counties, housing
remains weak as high unemployment and falling prices deter
first-time and move-up homebuyers.

A contraction in supply hasn’t helped increase property
values, which are down by a third from their July 2006 peak.
Prices, hurt by discounted foreclosures and other distressed
sales, will fall 2 percent more this year before rising 1.4
percent in 2013, according to a Moody’s Analytics projection.

Case-Shiller Index

Home prices dropped 3.8 percent in January from a year
earlier, the SP/Case-Shiller index of property values in 20
U.S. cities showed today. The measure is based on a three-month
average, which means the January data were influenced by
transactions in November and December.

A residential comeback would provide a boost to the U.S.
economy. Housing will “contribute modestly” to the economy
this year for the first time since 2005, according to Peter de Bruin, an economist at ABN Amro Group Economics in Amsterdam.

Rising demand for homes has cut into the supply, which is
already low because many sellers — especially those with
negative equity — are waiting for prices to increase before
putting properties on the market.

Supply of Homes

About 2.43 million existing homes were listed for sale in
February, the fewest for the month since 2005, the year U.S.
home sales reached a record 7.08 million, the National
Association of Realtors reported March 21. The number of
listings rose by 100,000 from January, a seasonal bump that
occurred every February since 2000 except for 2008, according to
data collected by the Realtors.

The February supply of unsold homes listed for sale was
down almost 50 percent from a year earlier in markets such as
Miami, Phoenix and Oakland, California, according to
Realtor.com, the National Association of Realtors’ official
website.

The U.S. inventory of new homes stood at 150,000, a 5.8-
month supply, in February, when new houses sold at an annual
pace of 313,000, slower than analysts expected, the Census
Bureau reported March 23.

The supply of new houses rose from 5.7 months in January
“as builders put inventory in place for the spring selling
season,” Stephen East, an analyst with International Strategy
Investment Group LLC in St. Charles, Missouri, wrote in a note
to investors. “This is the fourth consecutive month inventory
has remained below six months’ supply, which is broadly
considered supply/demand equilibrium.”

The new-home supply peaked at 12.1 months in January 2009,
forcing builders to book losses as the economy fell into
recession. While the inventory has declined from that high, the
housing market still has hurdles to overcome.

Negative Equity

One hurdle for the residential market is the more than 11
million homes that had negative equity at the end of 2011,
meaning more is owed on the mortgage than the house is worth,
preventing owners from trying to market their properties,
according to CoreLogic.

“A big issue is underwater borrowers,” said Sam Khater,
senior economist for CoreLogic Inc. (CLGX), a real estate data provider
based in Santa Ana, California. “If they want to move, they’re
not flexible with their price. The lowest they can sell at is
their mortgage amount. So there’s price stickiness.”

In a sign that demand for new homes remains weak, orders
fell 8 percent from a year earlier for the quarter ended Feb. 29
at KB Home (KBH), a Los Angeles-based builder that targets first-time
buyers.

“In a recovering market, the results did an absolutely
ugly U-turn,” East, the International Strategy analyst, wrote
in a note after earnings were released March 23.

Lagging Indicator

The median existing-home price in the U.S. climbed 0.3
percent to $156,600 in February from a year earlier. It was the
biggest year-over-year gain since July 2010, when President
Barack Obama’s homebuyer tax credit temporarily boosted values.

“Prices are a lagging indicator,” Khater said in a
telephone interview. “The key metric to look at are sales
numbers.”

Existing homes sold at an annual pace of 4.59 million in
February, up 8.8 percent from a year earlier and the busiest
February since 2007, according to the National Association of
Realtors. The February number was down 0.9 percent from January,
when an unusually warm winter in much of the country helped
increase demand, according to Paul Dales, senior U.S. economist
for Capital Economics in London.

‘Demand Picks Up’

“Good weather does not generate extra housing demand — it
just brings it forward from future periods,” he wrote in a
March 21 note to clients. “But the bigger point is that a
genuine upward trend is under way, with sales 9 percent higher
than a year ago and 13 percent above levels seen in July.”

Asking prices tend to be higher and inventory tends to be
lower from March through May, while sales peak by June and
inventory reaches a top in July, said Jed Kolko, chief economist
for Trulia, a consumer-oriented real estate information service.

“As housing comes out of hibernation in the spring, demand
picks up,” Kolko said in a telephone interview from San
Francisco. “Prices peak early in the season and inventory peaks
later. Buyers should be more patient, but sellers should move
faster.”

Competition Increases

Agents encountered multiple bids on about half of offers in
Seattle, Boston, Washington, D.C. and Oregon this year through
March 15, said Tim Ellis, real estate analyst for online
brokerage Redfin. In the San Francisco area, Redfin agents
reported that three of four offers involved competition, he
said.

One home in Palo Alto, California, received 38 offers and
sold for $1.65 million, or $452,000 more than its asking price,
said Ken DeLeon, a real estate broker in Silicon Valley since
2002. Another client paid $2.56 million for a home in 2007 and
is listing it for $3 million, with the expectation of receiving
higher offers, he said. The seller wants to use the proceeds to
buy a home in Saratoga, about 18 miles southeast of Palo Alto,
where the market hasn’t heated up yet, DeLeon said.

Prices are hitting all-time highs, above Palo Alto’s 2007
peak levels, in the 94301 and 94306 ZIP codes, as buyers rush to
purchase in advance of an expected flood of newly minted
millionaires when Facebook Inc. (FB) has its initial public offering,
DeLeon said. The Menlo Park-based social-networking company
filed paperwork in February for an IPO that may result in a
market valuation of $75 billion to $100 billion.

‘Hottest Housing Market’

“It’s insane,” DeLeon, who brokered 101 home sales last
year valued at $275 million, said in a telephone interview.
“It’s probably the hottest housing market in the nation.”

In Phoenix, total listings as of March 23 were down 43
percent from a year earlier to 21,346 homes on the market,
according to the Cromford Report, a Phoenix-area market research
service. When pending sales are excluded, the number of
available homes on the market fell 55 percent from a year ago.
Distressed offerings dropped more, with the number of short-sale
listings down 84 percent and bank-owned homes off 80 percent.

The average home’s time on the market fell to 90 days from
114 a year earlier, and the median sale price rose to $126,000
from $110,000, according to the Cromford Report.

Shopper Sentiment Improves

Contributing to the higher prices and faster sales pace in
Phoenix were high investor-buying activity, normal homebuyers
attempting to enter the market, speedier short-sale processes
and an improvement in shopper sentiment, said Mike Orr,
publisher of the Cromford Report. In a short sale, a property is
sold for less than the amount owed on it.

“The inventory decline is accelerating,” Orr, who’s also
director of the Center for Real Estate Theory and Practice at
Arizona State University’s business school, said in an e-mail.

The key ingredients are in place for a housing recovery in
the strongest U.S. job markets, where sales are outpacing new
listings and banks have worked through the backlog of
foreclosures, Douglas Duncan, Fannie Mae (FNMA)’s chief economist, said
in an interview.

The unemployment rates have fallen over the past year by
more than one percentage point in the Miami, Phoenix, San
Francisco, Seattle and Washington, D.C., areas, according to
Bureau of Labor Statistics data.

Listings in Washington fell 27 percent from a year earlier
in February, while the median price rose 11 percent to $398,500
and homes sold after an average of 74 days on the market, a 20
percent decline, according to Metropolitan Regional Information
Systems Inc., a real estate listing service in Rockville,
Maryland.

‘Pricing a Little Low’

In neighborhoods such as Capitol Hill, sellers are
prompting bidding wars by asking less than they expect to
receive, said Sean Aalai, an agent with Lindsay Reishman Real
Estate.

“They’re purposely pricing a little low,” Aalai said in a
telephone interview. “Buyers walk in and fall in love and the
property starts getting bid up.”

Single-family home prices in the Miami area increased 19
percent from a year earlier to a median $175,000 in February,
the third consecutive year-over-year increase, the Miami
Association of Realtors reported March 21.

The number of listings fell to 5,061 in February, or about
six months’ supply, down from a nine-month supply a year
earlier, as foreign buyers joined out-of-staters and Floridians
seeking to take advantage of low prices, said Ron Shuffield,
president of Esslinger Wooten Maxwell Inc., a real estate firm
in Coral Gables, Florida.

‘Best Spring Season’

“This has been the best spring season since 2005,” he
said in a telephone interview. “The entire world’s buying here.
They love the weather.”

The Miami-area inventory of homes selling for less than
$100,000 fell to less than three months’ supply in February as
investors snapped up low-cost properties and the availability of
bank-owned homes shrank as lenders slowed the pace of
foreclosures, Shuffield said.

Listings may swell in coming months as lenders allow more
foreclosures to flow onto the market. The top U.S. mortgage
servicing banks, which agreed to a $25 billion settlement over
foreclosure abuses last month, slowed the pace of foreclosures
as they negotiated for more than a year with state attorneys
general.

Foreclosures to Come

A shadow inventory of an estimated 1.6 million homes either
facing foreclosure or already repossessed by banks was being
held off the market in January, little changed from a year
earlier, CoreLogic reported March 21.

“As we move into what is traditionally the peak selling
season for real estate, servicers will certainly be watching
closely to see if now is the time to move more inventory out of
the shadows,” CoreLogic Chief Executive Officer Anand Nallathambi said in a statement.

Many states that don’t require court approval for
foreclosures have worked through much of their shadow inventory.
In Arizona and California, where banks take less time to
repossess and resell foreclosures because the process doesn’t
require judicial review, 7 percent of mortgages were delinquent
at least 90 days or in foreclosure in the fourth quarter, down
from about 13 percent in 2009, according to the Mortgage Bankers
Association.

In Florida, where the court system is clogged with home
seizure cases, 18 percent of houses with a mortgage are in the
foreclosure pipeline, compared with 20 percent in 2009, the
Mortgage Bankers Association reported. In other states that
require judicial review, such as New Jersey and New York, the
number of homes in the pipeline increased.

Time to Move

“If the foreclosure process has moved efficiently so that
whatever problem there was has been taken care of, you’re going
to see price appreciation as long as employment is growing,”
Fannie Mae’s Duncan said in an interview.

For the most part, sellers are marketing their properties
because of life changes, including taking a new job, getting a
divorce or having their grown children move out, Khater said.

A four-bedroom home on 1.3 acres (0.53 hectare) in the
Detroit suburb of Bloomfield Hills, Michigan, went on the market
in October, when the owners decided to “downsize,” said
Barbara Nigro, who has lived in the house since 1976.

“Now it’s time for another family to move in and raise
their children there,” she said in a telephone interview from
Scottsdale, Arizona, where she and her husband own a winter
home.

The Nigros dropped their asking price by $150,000 to
$950,000 in January, according to the listing. An offer is
pending.

Seller’s Patience

“Maybe if I kept it for two more years I’d make more
money,” said Michael Nigro, 71, a retired pediatric
neurologist. “I don’t have the patience for that. I don’t want
the responsibility.”

Lori Bakken, the agent who represents the Hensleys, said
three of four bids she submits on behalf of buyers face
competition. She said she expects the dearth of supply to be
temporary.

“As word gets out there that there is a lack of inventory,
I believe sellers will seize on that opportunity,” Bakken said.

The Hensleys haven’t given up on living in the Renton,
Washington, area, where both sets of parents live. The winning
bidder offered $15,000 above the asking price and didn’t make
the sale contingent on successful financing or inspection,
according to Kimberly Hobbs, the Seattle broker who represented
the seller.

“From this experience we learned that we have to move
fast, especially if a house is nice,” Matthew Hensley said.
“The competition is fierce out there.”

To contact the reporters on this story:
Prashant Gopal in New York at
pgopal2@bloomberg.net;
John Gittelsohn in Los Angeles at
johngitt@bloomberg.net

To contact the editor responsible for this story:
Daniel Taub at
dtaub@bloomberg.net