Housing inventory is now at its lowest level since January 1994; home sales have exceeded listings for the past 25 months; and the upward trajectory in home prices starting at the end of last year continues, according to the latest “US Housing Market Monthly” from Capital Economics.

Home sales are “normal” relative to population, but supply remains low, according to the firm.

Declining foreclosures are contributing to the current environment of tight inventory. In fact, Capital Economics points out the latest data from the Mortgage Bankers Association (MBA) reveals the foreclosure inventory rate fell from 4 percent of mortgages in the third quarter of 2012 to 3.7 percent in the fourth quarter.

The foreclosure start rate has fallen to its lowest level since the second quarter of 2007—about 0.7 percent, according to MBA data.

House prices increased 9.7 percent year-over-year in January, continuing a recent trend, and prices show “no signs of an imminent slowdown,” according to Capital Economics.

Despite these increases, housing affordability remains high. As of December, the National Association of Realtors calculated affordability at 200, meaning a family earning a median-level income has double the amount needed to afford a median-priced home.

“Higher prices and mortgage rates mean that affordability will have worsened since then,” Capital Economics stated in its report. “But the bigger picture remains that the monthly costs of owning a home are currently very low.”

Homes remain undervalued compared to rents, but the gap is closing, according to the economists. In the fourth quarter of 2011 houses were undervalued between 4 percent and 10 percent compared to rents. As of the fourth quarter of 2012, houses were undervalued between 1 percent and 5 percent compared to rents.

Regardless, “house prices can keep rising for a good while yet,” according to Capital Economics, and in fact, rising prices will help prompt some homeowners to sell, helping to boost inventory, according to the firm.

While mortgage rates have risen in recent months, economists at Capital Economics believe they are “a long way from becoming a constraint on the recovery.”

Additionally, changes in mortgage rates may not mean much for a market in which mortgage applications are on the decline. According to Capital Economics, home sales have increased 44 percent since July 2010, but mortgage applications have risen just 16 percent, indicating “investors and cash buyers are still driving the recovery in activity.”

by Krista Brooks