U.S. home prices are inching up as an ebbing tide of foreclosures creates a shortage of properties at a time of pent-up demand, but do not expect the housing market recovery to shift into higher gear.

Tightening house supplies have turned some parts of the country into sellers' markets, marked by intense bidding wars among buyers eager to take advantage of rock-bottom mortgage rates and still-low home prices.

"It is encouraging that demand is flowing back into the market and buyers are getting off the fence at last," Stan Humphries, chief economist at real estate group Zillow told Reuters.

But it's not off to the races for the housing market, the main trigger of the 2007-09 recession. Many homeowners remain saddled with properties worth less than the amount they owe banks and other financial institutions.

This means they cannot afford to sell their houses, even if they wanted to. As such, the supply of houses on the market will remain tight and weigh on sales.

Home resales declined 5.4 percent in June, with realtors blaming the drop on lack of inventory.

Contracts to buy homes, a forward-looking indicator of sales, also fell during the month for the same reason, casting a shadow on the budding housing market recovery.

"There is plenty of demand out there, but not much supply. What we need is increased sales volumes, not just stable prices. That's what the economy needs," said Glenn Kelman, chief executive officer at real estate group Redfin.

"Right now I don't think there is going to be a massive increase in sales volumes."

Part of the increase in demand reflects a modestly improving economy, especially the jobs market, which is encouraging some adult children to move out of their parents' basements. High rental rates also are making homeownership attractive.

In June there were about 2.39 million previously owned homes on the market, down from a peak of 4.04 million in July 2007, according to the National Association of Realtors. The figure does not include new homes, where inventory is near record lows.

SUPPLY AND DEMAND IMBALANCE

In a short space of time, foreclosed properties have gone from a deluge to a trickle, creating an imbalance between supply and demand in the market that is squeezing prices up.

Analysts partly attribute the ebb in foreclosures to tough regulations in some states in the wake of the "robo-signing" scandal in 2011, when it emerged that some bank employees were signing reams of foreclosure documents without properly reviewing individual cases.

Lenders are also aggressively pursuing alternatives to foreclosures, such as loan modifications. The steepest declines in housing inventories have been in Phoenix, San Francisco, Los Angeles, Minneapolis and Miami.

Riverside in California has also seen a decline in supply.

"These markets have seen demand pick up, pulling inventory off the market. Normally that would bring sellers off the fence and into the market. In some of these markets, negative equity is playing a big role in constraining supply," said Humphries.

"Even though there is demand out there and the seller wants to sell, if the value of their home is less than the mortgage, then they are unable to put their home on the market."

According to the Commerce Department there were 1.6 million vacant housing units for sale in the second quarter, down from 2 million units in the same period last year. That constituted 1.2 percent of the nation's total 132.72 million housing units.

The number of units held off the market rose to 7.61 million from 7.35 million in the second quarter of 2011. That accounted for 5.7 percent of the total housing stock.

With foreclosures waning, house prices across the country are stabilizing and rising in some cities, causing some prospective sellers to hold onto their properties.

Average home prices rose 2.2 percent in May from April in the 20 cities tracked by Standard & Poor's/Case-Shiller. They were down only 0.7 percent from a year ago.

"If you think we are at the bottom of the market, you wouldn't want to sell, you would want to wait until prices recover a little bit," said Redfin's Kelman.

"The only folks who are selling right now are the folks who have to, you don't see many opportunistic sellers. They believe time is on their side and if they wait, things will only get better for them."

Tight supplies are fueling bidding wars among buyers, mostly prevalent in cities like Washington DC and Seattle. Bidding wars are also intense in California's Silicon Valley.

INTENSE BIDDING WARS

"We have just listed a property in South Pasadena. We put it on the market at 10 a.m. and by 2 p.m. we had 20 people calling us trying to buy it. The closer it is to the urban core, the more likely it is to have multiple offers," said Kelman.

"It was more intense in the spring. Usually you see this big run-up in listings in May and June. This year you didn't because the banks weren't putting up properties for sale and homeowners did not take the bait either."

The shortage of houses is most acute in the low end of the market, which has experienced a surge in demand from first-time buyers. The luxury market has also seen an increase in demand, but not of the same magnitude as the first-time buyers segment.

"The demand is greater than most people imagine because we have about a four-year build-up on the demand side," said Diane Saatchi, senior vice president at realtor Saunders & Associates. "Buyers have been waiting for the market to go down and the perception now is we have hit a bottom."

On the other end of the spectrum are cities like Chicago, Philadelphia, Cincinnati, Cleveland and Milwaukee where homes are staying longer on the market and price discounting is still the norm.

Gains in house prices are unlikely to follow a straight line as some homeowners, currently underwater, will probably want to sell their properties on the slight appreciation in value.

"We will see a staircase recovery, where you will see price spikes followed by cooling because once prices have spiked, they will free some people from negative equity or these people who didn't want to sell at the bottom will feel better about selling," said Humphries.

"In a few markets, like Miami and Phoenix, are seeing a V-shaped recovery," he added - good news for two of the cities that took a particularly hard hit when the housing bubble burst.