(Bloomberg) — Matthew and Carina Hensley offered $10,000 more than the asking price for a three-bedroom house in suburban Seattle, then lost out to one of seven other bidders.

Their $270,000 proposal last month came with a family portrait and a letter introducing the couple, their 8-month-old daughter and their desire to build a family in the Renton, Wash., house with a yard backing onto a woody hillside.

Bidding wars, absent from most parts of the U.S. residential market since its peak in 2006, are erupting from Seattle and Silicon Valley to Miami and Washington, D.C. The inventory of homes hovers close to a six-year low, while an increase in jobs and record affordability are tempting more buyers. The number of contracts to buy previously owned homes jumped 14 percent in February from a year earlier, the National Association of Realtors reported this week.

“We understand there is going to be fierce competition in the offers made for your house but Carina and I both felt very strong about letting you know what it would mean to us if we were given the opportunity to live in your gorgeous and charming house,” wrote Matthew Hensley, 33, a credit union branch manager. Such letters from eager buyers were common during the housing boom.

While listings will probably rise as banks accelerate foreclosures and sellers gain confidence in the market, the U.S. metropolitan areas with the strongest economies may be ready to absorb the additional inventory, said Mark Zandi, chief economist for Moody’s Analytics in West Chester, Pa. Low values and interest rates have made buying a better deal than renting in 98 of the largest 100 metropolitan areas, according to Trulia Inc.

“The housing crash is finally giving way to recovery in an increasing number of markets across the country,” Zandi said. “The decline in unsold listings and vacant homes and the increase in rents presage better times ahead for single-family housing.”

The bidding wars seen in such places as Seattle aren’t found everywhere. In metropolitan areas including Atlanta and California’s Riverside and San Bernardino counties, housing remains weak as high unemployment and falling prices deter first-time and move-up homebuyers.

A contraction in supply hasn’t helped increase property values, which are down by a third from their July 2006 peak. Prices, hurt by discounted foreclosures and other distressed sales, will fall 2 percent more this year before rising
1.4 percent in 2013, according to a Moody’s Analytics projection.

Home prices dropped 3.8 percent in January from a year earlier, the S&P/Case-Shiller index of property values in 20 U.S. cities showed last week. The measure is based on a three-month average, which means the January data were influenced by transactions in November and December.

Rising demand for homes has cut into the supply, which is already low because many sellers — especially those with negative equity — are waiting for prices to increase before putting properties on the market.

About 2.43 million existing homes were listed for sale in February, the fewest for the month since 2005, the year U.S. home sales reached a record 7.08 million, the National Association of Realtors reported March 21. The number of listings rose by 100,000 from January, a seasonal bump that occurred every February since 2000 except for 2008, according to data collected by the Realtors.

The February supply of unsold homes listed for sale was down almost
50 percent from a year earlier in markets such as Miami, Phoenix, Ariz., and Oakland, Calif., according to Realtor.com, the National Association of Realtors’ official website.

The U.S. inventory of new homes stood at 150,000, a 5.8- month
supply, in February, when new houses sold at an annual pace of 313,000, slower than analysts expected, the Census Bureau reported March 23.

The supply of new houses rose from 5.7 months in January “as builders put inventory in place for the spring selling season,” Stephen East, an analyst with International Strategy & Investment Group in St. Charles, Mo., wrote in a note to investors. “This is the fourth consecutive month inventory has remained below six months’ supply, which is broadly considered supply/demand equilibrium.”

The new-home supply peaked at 12.1 months in January 2009, forcing builders to book losses as the economy fell into recession. While the inventory has declined from that high, the housing market still has hurdles to overcome.

One is the more than 11 million homes that had negative equity at the end of 2011, meaning more is owed on the mortgage than the house is worth.

“A big issue is underwater borrowers,” said Sam Khater, senior economist for CoreLogic, a real estate data provider based in Santa Ana, Calif. “If they want to move, they’re not flexible with their price. The lowest they can sell at is their mortgage amount. So there’s price stickiness.”

In a sign that demand for new homes remains weak, orders fell 8 percent from a year earlier for the quarter ended Feb. 29 at KB Home, a Los Angeles-based builder that targets first-time buyers.

The median existing-home price climbed 0.3 percent to $156,600 in February from a year earlier. It was the biggest year-over-year gain since July 2010, when President Obama’s homebuyer tax credit temporarily boosted values.

“Prices are a lagging indicator,” Khater said. “The key metric to look at are sales numbers.”

Existing homes sold at an annual pace of 4.59 million in February, up 8.8 percent from a year earlier and the busiest February since 2007, according to the National Association of Realtors. The February number was down 0.9 percent from January, when an unusually warm winter in much of the country helped increase demand, according to Paul Dales, senior U.S. economist for Capital Economics in London.

“Good weather does not generate extra housing demand — it just brings it forward from future periods,” he wrote in a March 21 note to clients. “But the bigger point is that a genuine upward trend is under way, with sales 9 percent higher than a year ago and 13 percent above levels seen in July.”

Asking prices tend to be higher and inventory tends to be lower from March through May, while sales peak by June and inventory reaches a top in July, said Jed Kolko, chief economist for Trulia, a consumer-oriented real estate information service.

Agents encountered multiple bids on about half of offers in Seattle, Boston, Washington, D.C. and Oregon this year through March 15, said Tim Ellis, real estate analyst for online brokerage Redfin.

In Phoenix, total listings as of March 23 were down 43 percent from a year earlier to 21,346 homes on the market, according to the Cromford Report, a local market research service. Excluding pending sales, the number of available homes on the market fell 55 percent from a year ago. Distressed offerings dropped more, with the number of short-sale listings down 84 percent and bank-owned homes off 80 percent. The average time on the market fell to 90 days from 114 a year earlier, and the median sale price rose to $126,000 from $110,000.

The key ingredients are in place for a housing recovery in the strongest U.S. job markets, where sales are outpacing new listings and banks have worked through the backlog of foreclosures, said Douglas Duncan, Fannie Mae’s chief economist.

Unemployment rates have fallen over the past year by more than one percentage point in the Miami, Phoenix, San Francisco, Seattle and Washington, D.C., areas, according to Bureau of Labor Statistics data.

Listings in Washington fell 27 percent from a year earlier in February, while the median price rose 11 percent to $398,500 and homes sold after an average of 74 days on the market, a 20 percent decline, according to Metropolitan Regional Information Systems Inc., a real estate listing service in Rockville, Md.

Single-family home prices in the Miami area increased 19 percent from a year earlier to a median $175,000 in February, the third consecutive year-over-year increase, the Miami Association of Realtors reported March 21.

The number of listings fell to 5,061 in February, or about six months’ supply, down from a nine-month supply a year earlier, as foreign buyers joined out-of-staters and Floridians taking advantage of low prices, said Ron Shuffield, president of Esslinger Wooten Maxwell, a real estate firm in Coral Gables.

Listings may swell in coming months as lenders allow more foreclosures to flow onto the market. The top U.S. mortgage servicing banks, which agreed to a $25 billion settlement over foreclosure abuses last month, slowed the pace of foreclosures as they negotiated for more than a year with state attorneys general.

A shadow inventory of an estimated 1.6 million homes either facing foreclosure or already repossessed by banks was being held off the market in January, little changed from a year earlier, CoreLogic reported March 21.

Many states that don’t require court approval for foreclosures have worked through much of their shadow inventory. In Arizona and California, where banks take less time to repossess and resell foreclosures because the process doesn’t require judicial review, 7 percent of mortgages were delinquent at least 90 days or in foreclosure in the fourth quarter, down from about 13 percent in 2009, according to the Mortgage Bankers Association.

In Florida, where the court system is clogged with home seizure cases, 18 percent of houses with a mortgage are in the foreclosure pipeline, compared with 20 percent in 2009, the Mortgage Bankers Association reported. In other states that require judicial review, such as New Jersey and New York, the number of homes in the pipeline increased.

Sellers mostly are marketing their properties because of life changes, including taking a new job, getting a divorce or having their grown children move out, Khater said.

Meanwhile, the Hensleys haven’t given up on living in the Renton area in Washington. They lost out to a bidder whose broker said offered $15,000 above the asking price and didn’t make the sale contingent on successful financing or inspection.

“From this experience we learned that we have to move fast, especially if a house is nice,” Matthew Hensley said. “The competition is fierce out there.”

— Editors: Two photos available at www.wpbloom.com.