With low prices and mortgage rates, it should be a great time to buy a home. But tight housing inventories can make it a bear.

The limited supply of houses for sale in the current market can make finding the right property a challenge even for well-financed homebuyers with good credit. Competition among buyers can be stiff, with multiple offers for a single property quite common in many parts of the country.

How tight is it?

The supply of available homes for sale fell to its lowest level in 13 years in January, 1.74 million homes, according to the National Association of Realtors (NAR). That represents a little more than a four-month supply, whereas six months or less is generally considered a seller's market. The NAR also reports that, on average, homes are selling about four weeks faster than they did a year ago.

The decline is sharpest among homes at the top of the market. According to Zillow, the supply of high-end homes for sale is down more than 20 percent from one year ago, while the inventory of mid-value homes has shrunk by 17 percent and lower-priced properties by 9 percent.

Certain markets have seen even bigger declines. In San Francisco, the inventory of homes for sale has fallen 47 percent over the past year, while in Seattle, the inventory fell 9 percent in the single month from December to January.

Why are there so few homes for sale?

There are several reasons for the tight market. First, home sales have been picking up over the past year, driven by increased consumer confidence, slowly rising employment and years of pent-up demand. Investors attracted by low prices have been snapping up many properties, particularly foreclosures, and holding them off the market as rentals or for sale when prices rebound.

Second, the pace of foreclosures has been slowing, even as mortgage delinquencies remain high, as lenders take a more deliberate approach toward repossession in the wake of last year's national foreclosure settlement reached by state attorneys general and the federal government with five of the nation's largest mortgage servicers.

Third, many homeowners who otherwise would be selling their homes and moving on to another property cannot do so because they are underwater on their mortgages and unable to sell, at least not without taking a major financial hit. Even others who are not underwater may be reluctant to sell because their home has fallen in value from when they bought it and are unwilling to move on until the price has recovered more.

Buying a home in a tight market

So what can you do if you're shopping for a home? First, recognize that the competition is going to be tight. Don't expect to be able to go home and sleep on an attractive home for a few days - someone else may snap it up first.

You also may not have much room to negotiate on price or other terms of the sale. In fact, you may find yourself in a bidding war with several other buyers for a desirable property and end up offering more than the asking price.

The tight market has been driving up home prices as well. One of the downsides of this, aside from the obvious one that it makes homes more expensive, is that you may find it harder to get an assessment that will support your purchase price. Assessed values commonly trail actual values, particularly in a rising market such as this, because the comparable sales used to determine a value may be out of date, perhaps by a year.

If the assessed price doesn't support the agreed sale price, meaning the lender won't approve a mortgage for that price, you'll either have to try to renegotiate a lower sales price or - as sometimes happens in a tight market - you'll have to bring more cash to the table up front. In that case, it could reduce the amount of money you have for a down payment, meaning you may have to pay for private mortgage insurance and perhaps a higher interest rate as well.

Don't panic!

On the other hand, just because it's a competitive market doesn't mean you should rush in and grab the first house you like. Take a month or two to visit open houses and have a real estate agent show you some prospective properties so you can get a feel for the market and what's available in your budget.

Resist the temptation to make an offer on an attractive home early in the process. True, you'll sometimes miss a nice opportunity this way but it's more likely you'll find similar deals down the road and be better prepared to negotiate a deal as well. Once-in-a-lifetime deals are truly rare, by definition.

You'll also want to come in prepared to make an offer when the time comes. Know your credit score, get copies of your credit report and clean up any errors before you start shopping for a home. Explore mortgage options, get prequalified for a loan and be ready to start the application process the day you make an offer. Have funds available for a down payment, if not in cash then in a form where you can readily convert them when needed.

A tight market can lend a sense of urgency to the process of buying a house but don't let it rush you into making a hasty decision. Remember, you're going to be living in this house for some time. Don't drag your feet, but do be sure to take the time to get to know your local market and make the right choice at the right price.

    Published on March 23, 2013