A year ago, Ben and Melanie Gray thought about selling their Minneapolis townhouse near Lake of the Isles, but they figured it would never fetch a good price.

These days, the SOLD signs are abundant in their tree-filled neighborhood, and the Grays are confident that now is the right time to sell.

"Now that we've seen a shortage of inventory, selling is more of a reality for us," Ben Gray said.

With home sales climbing, more homeowners are testing the market. In October, new listings in the Twin Cities increased 7 percent over the same time last year, according to the Minneapolis Area Association of Realtors. It was the third time this year that monthly listings have jumped, a critical step in the burgeoning recovery of the housing market.

"That's what we need to see for a healthy recovery," said Herb Tousley, director of real estate programs at the University of St. Thomas. "We need to see more volume."

Since the housing crash, discounted foreclosures and inexpensive entry-level homes have dominated the recovery, putting a drag on values and putting more people underwater on their mortgages. Inventory also has been incredibly low, making it tough for potential buyers to find the home they want.

But as more people list their homes, the damage done by those distressed sales will dissipate, lifting values and reducing the number of people who must sell at a loss. "It's a healthy market when you have activity across all price ranges," said Tousley. "We need to get this whole market participating."

Glenn Kelman, chief executive of Redfin, an online real estate brokerage, said low mortgage rates alone aren't enough to move the market. More listings need to come on line.

"Sales volume will remain log-jammed until higher prices draw more move-up sellers into the market," Kelman said.

Redfin's quarterly survey of homeowners across the country said that about 15 percent of potential sellers think it's a good time to put their home on the market, up slightly from the previous quarter.

Timing felt right

Take Robin Nelson. She recently decided to sell her Twin Cities condo after going back and forth about whether the timing was right.

"There was just too much out there and the price point was lower than I'd want to go," said Nelson, who bought at the peak of the market.

But she wanted to upgrade to a larger condo that's closer to her job. She expected to take a small loss on her place, but was willing to do so because of the favorable price she might get on a more expensive condo.

Her gamble paid off. Shortly after listing her place for $224,900 -- slightly less than she paid in 2005 -- she got an offer.

And data show that house prices have stabilized, or increased in some areas.

There's anecdotal evidence, too. Dawnn Eldredge, a sales agent with Edina Realty, said she recently sold a house in Richfield for $149,000 -- the same house that didn't sell last year when it was listed for $129,000.

This shift has come as fewer homeowners are upside down on their mortgages. Zillow.com reported that the share of Twin Cities homes with negative equity made its sharpest drop on record last quarter: to 35.5 percent of all homes with a mortgage, from nearly 40 percent during the previous quarter.

Effect on flexibility

Such declines are significant because homeowners who are underwater are usually stuck with their home unless they're willing to negotiate a short sale or bridge the gap between what they owe and what a buyer is willing to pay.

"People are able to take a little less of a loss," said Andy Fazendin, the broker at Fazendin Realty in Wayzata and president of the Minneapolis Area Association of Realtors. "And they know that when they buy, they're going to make up for it because prices are still lower than they were back at peak."

But getting deals to close has been difficult because heavily discounted foreclosures and short sales have represented nearly half of all sales, making it difficult for appraisals to reflect the higher prices that some traditional sellers have been willing to pay in recent weeks.

Distressed sales have been waning, though, and the share of listings that have gone through foreclosure has fallen to the lowest level since the housing crash began. Because of this shift, a recent Fannie Mae national housing survey said that nearly 20 percent of Americans view the current market as a good time to sell -- the highest point since the survey began in June 2010.

The Grays have their fingers crossed that someone will fall in love with their place like they did. To boost their chances of selling, they're are having their townhouse completely painted and staged. It's in the final days before hitting the market, and they're feeling good.

"We love our place, but the more children we've had, the less likable it is," Ben Gray said. "That's inspired us to put ours on the market."

Jim Buchta • 612-673-7376