But eventually rising prices will encourage homeowners to sell and builders to build, which will add to inventory and break the spiral.

So the important question is when will inventory bottom?

Kolko looked at the monthly change in inventory before and after local prices bottomed in the metros with the largest price gains such as Phoenix, Las Vegas and Oakland, CA.

It appears supply of homes declined the most in the first 6 months after local home prices bottomed, with inventory falling by more than 2% on an average.

Inventory tends to decline less sharply a year after prices bottom, but in markets such as Phoenix and Miami, Kolko notes, prices have been rising for more than 18 months and yet inventory continues to decline.

"It could be at least another year until national inventory starts expanding," Kolko writes in his report. "Of course, inventory will probably turn up this spring and summer because of the regular seasonal pattern, but the underlying trend will be less inventory than is typical for each season, not more."

The question of when inventory will turn around will depend not only on "how fast prices are rising, but also on whether prices will have been rising for long enough to encourage homeowners to sell and builders to build," he wrote.

For now, prices continue to edge higher.

In February, asking prices rose 1.4% month-over-month, seasonally adjusted - the highest monthly gain since the home price recovery began, according to Trulia's Price Monitor. Year-over-year, asking prices rose 7.0% and were up in 90 of the 100 largest metros, with the biggest gains in Phoenix, Las Vegas, and Oakland.

Asking prices lead sales prices by two months and serves as an early indicator of trends in homes prices.

-- Written by Shanthi Bharatwaj in New York.

>To contact the writer of this article, click here: Shanthi Bharatwaj.

>To follow the writer on Twitter, go to http://twitter.com/shavenk.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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