It’s hard to imagine, given that the nation’s housing market is still digging itself out of an epic foreclosure crisis, that there just are not enough homes available to buy. That, apparently, is the case, according to the National Association of Realtors, who blame a drop in home sales on an “acute lack of supply” in certain formerly hot markets.

“Recent price increases are not deterring buyer interest,” notes Lawrence Yun, NAR’s chief economist. “Rather, inventory shortages are limiting sales, notably in parts of the West.”

A little perspective.

The housing recovery has largely been driven by investors on the low end of the market. Cities like Phoenix, Las Vegas and Sacramento, CA, where the foreclosure crisis hit hardest and where home prices fell the most, were swarmed by these investors, who were looking to convert this distress into rental rewards. Witness, sales of homes priced under $100,000 in the West are down 47 percent from a year ago, according to the Realtors. This after investors drove prices notably higher. Distressed sales made up just 24 percent of total home sales in September, while they had been making up over one third of sales for the past two years.

(Read More: Home Prices Find New Peaks in Dozens of Cities)

So where is all this distressed supply, given that there are still 5.45 million homes with mortgages that are either delinquent or in the foreclosure process (per LPS Applied Analytics)? Banks are doing more foreclosure alternatives, like short sales, but they are also making more aggressive loan modifications. Bank of America
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] this week announced that in the past five months it has reduced principal on 30,000 troubled loans, with an average reduction of $145,000. This as part of the mortgage servicing settlement signed early this year. Loan modifications with reduced principal have a much lower re-default rate.

Yun suggests that builders need to really ramp up production in order for home sales to recover more.

Housing starts for single family homes in September were up 43 percent from a year ago and building permits up 27%, but the real volumes are still about half the normal level. New homes are popular with first-time home buyers, who are only making up 32 percent of the market, whereas they normally represent about 45 percent. That is due to still tight credit conditions.

(Read More: Is Housing Recovering as Much as Everyone Thinks?)

The biggest problem is that regular home sellers are not putting their homes on the market at a high enough rate to offset the drop in distressed volumes. Why? Part of it is still a lack of confidence in the market, but most of it that, as of August, about 15 million homeowners still owed more on their mortgages than their homes were worth, according to Zillow. That’s 31 percent of homes with a mortgage. Negative equity and near negative equity is largely what is holding the market back now, even as distressed homes slowly move out of the system.

(Read More: Apartment Demand Ebbs as ‘Avalanche’ of New Units Open)

Given the huge drops in sales and inventory out West, which had been driving much of the gains in the overall market, some analysts predict deeper sales drops in the coming months. While sales of higher priced homes are up considerably from a year ago, they still make up a very small share of the total market. About 65 percent of the market is made up of homes priced lower than $250,000. These are a lot of numbers to digest, but they add up to a still bumpy recovery ahead for housing.

Sector Watch: US Home Builders – Click on Ticker to Follow Real Estate News:

• Toll Brothers
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• DR Horton
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• Hovnanian Enterprises
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• PulteGroup
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• Ryland Group
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• Lennar Corp
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• Beazer Homes USA
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• Meritage Homes
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• KB Home
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