As a result, home prices are now rising more and faster than most analysts predicted due to this short supply, up 7.4 percent year-over-year in November, according to CoreLogic. They are especially surging in some of the hardest hit markets from the housing crash, where large-scale investors are swarming with cash in hand. In Phoenix, home values jumped nearly 32 percent from a year ago in November and are now at the highest level since October of 2008 according to DataQuick. While still 39 percent off their boom-high in June of 2006, they are now up 41.5 percent from the bottom, and there is not much on the market.
(Read More: Could Rentals Be the New Red Flags in Real Estate?)
Healthy housing market gains are historically driven by increasing employment and income, not by lack of supply; the latter leads to price bubbles. First-time home buyers, who generally account for 40 percent of the home-buying market or higher are still under-represented at just 30 percent, according to the Realtors. This is due to tighter credit conditions in the mortgage market and now decreasing affordability.
December's disappointing drop in home sales, month-to-month is a clear warning for the housing recovery going forward. Rising home prices are not the sole measure of a healthy market. Supply and demand need to fall closer in line, and a robust economic recovery should be driving both home sales and prices.
(Read More: One Overlooked Fact About the Housing Recovery)