The nation's home builders started fewer single-family homes in May than predicted, which is curious given the low U.S. supply of new and existing homes for sale. In market after market, listings are down dramatically from a year ago. It begs the question, why are builders not digging into this recovery at a faster clip?
"The builders are running out of lots in subdivisions they're building in, so they're slowing down sales by raising prices," said Bradley Hunter of Florida-based Metrostudy.
Home builder confidence took a big jump in May against a backdrop of flat single family starts.
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"What are they so excited about?" asked Hunter. "That they have pricing power."
Housing completions fell 0.9 percent to an annualized rate of 690,000, well below demand. Underlying demand consists of new households forming (about 1.1 million, according to Census data,) replacement demand (about 250,000 homes) and second home demand (about 50,000,) according to IHS Global Insight.
"The wide gap between housing completions and underlying demand suggests that inventories are likely to get leaner over the next 12 months," IHS analysts said in a report to investors. "For the record, it takes about seven months on average for a single-family permit to turn into a completed home."
The supply pinch can be seen quite dramatically in California, where there was barely a two-month supply of homes for sale in May. That, and a change in the mix of home sales from distressed to nondistressed, pushed the median sale price up 32 percent from a year ago. Some might call that a "bubble," but the real state agents do not.
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"While home prices are increasing at levels above those observed in 2006-2007, the fundamentals of the housing market are much more solid than what we experienced a few years ago," said Leslie Appleton-Young, chief economist for the California Association of Realtors. "More home buyers are putting down larger down payments, and many of them are opting for more stable loan products."
That may be, but the jump in the median California home price jump is predominantly due to a change in the mix of homes selling, that is, more nondistressed sales and fewer foreclosure and short sales. The median price is where half the homes sell for more and half sell for less. In May, distressed properties accounted for 31 percent of total sales in California, down from 52 percent of sales a year ago, according to Propertyradar, a data and analytics company. Meanwhile, nondistressed sales were 69 percent of total sales, up from 48 percent a year ago.
"In this bifurcated market, nondistressed sales are up smartly for the year but distressed sales are falling faster than the rise in nondistressed sales," noted Propertyradar's Madeline Schnapp. "The dramatic increase in California median home prices belies the fact that May sales, a month normally characterized by rising sales, declined 11.1 percent year over year."
The home builders had been competing against distressed properties, many of which were relatively new construction. That competition is fast fading, and more buyers are turning to the builders because there is just so little out there at all. Builders are hampered by labor and supply constraints, but they are also clearly taking advantage of rising prices.
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"The recovery has been very concentrated in the best areas. The builders are deliberately metering out their sales pace and metering out their land because land is so precious. This isn't a recovery in the outskirts and the periphery where you would see more volume growth as we move forward," UBS analyst David Goldberg said in an interview on CNBC.
Questions? Comments? RealtyCheck@cnbc.com.