(MoneyWatch) Home prices and sales are on the increase, according to the latest data from the National Association of Realtors (NAR). Total existing-home sales rose 3.2 percent in the third quarter of 2012 to a seasonally adjusted rate of 4.86 million, up more than 10 percent from the same period in 2011.
At the end of the third quarter, 2.32 million homes were on the market for sale -- that's 20 percent below the close of the third quarter of 2011, when 2.90 million homes were on the market.
"Housing inventories have been gradually trending down from a record set in the summer of 2007," Lawrence Yun, NAR chief economist, said in a press release. "Earlier this year, a broad equilibrium began to develop in most areas between home buyers and sellers, which led to a sustained upturn in home prices."
That drop in inventory contributed to a rise in home prices in some areas. The median existing single-family home price rose in the majority -- 120 out of 149 -- of the metropolitan statistical areas (MSAs) covered in the report.
The national median existing single-family home price was $186,000 in the third quarter, up 7.6 percent from $173,000 in the third quarter of 2011. That marks the strongest yearly increase since the first quarter of 2006. Median condo and co-op prices also rose in the third quarter, up 7.7 percent year-over-year to $180,800.
The number of distressed homes on the market fell in the third quarter, also contributing to the increase in home prices. Foreclosures and short sales accounted for 23 percent of second quarter, down 30 percent from one year ago. Fewer homes for sale means buyers seeking to take advantage of today's low mortgage rates have less inventory to choose from, and that translates to an upswing in home prices.
"Historically low mortgage interest rates are encouraging many buyers who were on the sidelines," Moe Veissi, NAR president, said in a press release. "Sales this year are notably higher than the levels seen in 2008 through 2011, so we're clearly in a recovery phase with rising sales, declining inventory and rising prices."
Despite all the positives, 29 of the MSAs posted median price declines in the single-family home market and 21 saw median prices drop in the condo and co-op sector. The number of first-time buyers entering the market also fell, reaching 2011 levels.
First-time buyers purchased 32 percent of all homes in the third quarter, down from 34 percent in the second quarter and unchanged from one year ago. The share of all-cash purchases also fell to 27 percent of purchases, down from 29 percent in the second quarter and the third quarter of 2011.
Additionally, investor purchases dropped off in the third quarter, accounting for only 17 percent of transactions. That's down from 19 percent in the second quarter and 20 percent one year ago.
The decrease in first-time buyer and investor activity can be attributed to the limited inventory at the lower end of the market, says Yun. But first-time buyers are also impacted by tight lending restrictions, a factor not as crucial to investors, who often pay with cash.
"The recovery would be strong and more stable if we could return to safe but sensible mortgage underwriting," Veissi notes.
Homes may be selling at the lower end of the market, but that doesn't mean the recovery is happening fast. Many homeowners are still underwater -- roughly 30 percent of mortgaged homeowners, according to Zillow data -- and there are plenty of markets still over saturated with inventory.
Limited inventory and tight credit restrictions are keeping first-time buyers out of the market, but the economy is also to blame. Though we're on our way to a housing market rebound, consumers are still nervous about job security and their futures. Other would-be buyers aren't sold on the idea that homeownership is still a path to individual wealth. Mortgage rates that are hovering near record lows are a sign that the housing market is still on shaky ground.