Is housing turnaround around the corner?

For the first time since 2004, the supply of houses for sale across the Twin Cities area has begun to shrink. But with prices and the number of home sales still lagging behind last year's numbers, it's too soon to say the market's hit bottom.

In May, the number of homes for sale in the federally defined 13-county metro area was almost 3 percent lower than during the same period a year ago, according to data released Wednesday by several Twin Cities-area Realtors' associations. Last month, 9,436 new listings came on the market, a 16.2 percent decline from last year, according to the Minneapolis Area Association of Realtors.

"The market is losing weight," said Kevin Knudsen, president of the Minneapolis Area Association of Realtors and a branch manager for Coldwell Banker Burnet. "If this pattern continues, it [signals] the recovery of that marketplace."

Though the number of pending sales was down again last month -- by 7.6 percent from a year ago -- the Realtors' groups say there's cause for optimism because that drop is smaller than the double-digit declines of previous months.

Jim Paulson, chief investment strategist at Wells Capital Management in Minneapolis, said that a similar trend is playing out elsewhere. He said May's inventory decline in the Twin Cities could be "evidence of the initial stages of the bottom."

He said he'd need several months of similar numbers to draw a firm conclusion, however. He said activity during a single month can be heavily influenced by the weather and other factors .

"I would be real hesitant to put much stock in one month of housing numbers," Paulson said.

The collapse in home prices shaved nearly a full percentage point off the nation's gross domestic product. "If it just flat-lines, it will be a boost to the economy," Paulson said.

The market still faces several challenges, including sagging consumer confidence, tighter access to credit and mounting concerns about rising food and gas prices.

The biggest wild card, many say, is the extent to which the foreclosure crisis will dominate the market. Already, the broader market has been heavily influenced by sales of bank-owned listings and "short sales," or deals negotiated by sellers with their lenders that allow them to sell the property for less than the mortgage amount, according to research by the Minneapolis Area Association of Realtors.

While the median price of homes that sold in May was down 9.9 percent from the same period a year ago, the median price for those lender-mediated sales was $156,250 -- an 8 percent decline from last year -- and $226,000 for traditional sales, down 3.8 percent from last year.

Even if inventory levels continue to decline and pending sales increase, it could be many months or even years before there's significant positive pressure on prices, Paulson said.

There's already a 10.4-month supply of houses on the market across all price ranges, according to the Minneapolis Area Association of Realtors. In 2007 that number was 9.2, and in 2006, the market had a 6.8-month supply. The market is considered balanced with a five-month supply.

Home builders dramatically cut back on plans to build new houses as they focus on trying to sell existing inventory. Building permit activity in the Twin Cities metro area last month was half of what it was last year at this time, and in February, construction activity hit a 10-year low, according to permit data from the Builders Association of the Twin Cities.

Though the number of homes on the market is falling, buyers appear to be driving hard bargains as sellers adjust their expectations. Last month, sellers typically got 92.6 percent of their asking price, a 3.4-point decline from last year at this time. Industry statistics show that those price declines, along with relatively low mortgage interest rates and modest income growth, have made houses more affordable than they've been in years.