Inventories of homes, condos, townhouses and co-ops shrank for the third month in a row in July, falling 1.2 percent from June and 17.6 percent from a year ago, to 2.31 million, according to the latest numbers from Realtor.com.

Although shrinking inventories can be a positive sign, reflecting a rise in demand, it can also be a sign of volatility, as in some markets the decline in inventory is tied to a slowdown in foreclosures, restricting the supply of real estate owned (REO) properties.

When lenders resolve regulatory and legal issues related to loss mitigation and foreclosure practices, the flow of REO properties will resume. Areas with high unemployment rates and large numbers of seriously delinquent borrowers could again see inventories swell, Realtor.com said in summarizing listings data from the site.

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