The US housing recovery continued in October, with a relatively tight market raising the prospect of further gains in home prices – and a revival of new construction.

Sales of previously owned homes and condominiums rose to an annualized rate of 4.79 million units in October, the National Association of Realtors said Monday. That's not a big change from the prior two months, but what's notable is that the inventory of homes available "for sale" has been falling steadily since April.

The current inventory represents a 5.4-month supply at the current sales pace, the lowest since February 2006 – before the housing boom peaked and the market crashed.

Tightening supplies are one reason prices have been rising. The median price for a previously owned home was $178,600 in October, up 11 percent from a year ago.

Many housing analysts are predicting more gains in prices, as long as the economic recovery remains intact. In turn, all this confirms to homebuilders that they can get more people busy with hammers and concrete mixers.

That message has already been heard somewhat. New permits for single-family homes are up 22 percent over the past 12 months, according to data from the National Association of Home Builders. Permits for multifamily homes are up even more, 55 percent. And in the stock market, the price of an exchange-traded fund that invests in home builders has risen about 90 percent over the past year.

All this needs to be kept in perspective. Employment in construction appears to have stabilized, but remains far below its housing-boom levels. And one reason for the tight for-sale inventory is that many potential sellers are "under water," with homes that wouldn't fetch enough to pay off their mortgages.

But the recent patterns can still be counted as progress. As home values rise, the number of under-water borrowers decreases. The tide of foreclosures, while still high, has been receding. Construction workers who felt the recession severely can see better times ahead. And the combination of low interest rates and post-bubble home values makes home purchases attractive for many who can afford it.

"The improvement in existing home sales ... is being driven by the very favorable level of housing valuations and affordability," says Paul Diggle, a housing expert at Capital Economics in London, in a report Monday. "Supply conditions in the existing homes market are even tighter than we had previously thought."

A wild card, for the months ahead, is whether and how politicians resolve the "fiscal cliff" of tax hikes and federal spending cuts that are scheduled to take effect in January. The cliff could send the US economy into recession (and thus derail a housing recovery), but most economists expect that Congress and President Obama will cut a deal in time to avert the worst effects.

In the region encompassing New York and New Jersey, meanwhile, hurricane Sandy could also affect housing activity a bit in the next couple of months, some forecasters say. (Some modest negative impact in that region showed up in the October numbers.)

Another question is how credit conditions evolve. If banks grow more confident that home values are stable or rising, then borrowers will increasingly have access to today's extraordinarily low interest rates. Citing data from Freddie Mac, the Realtors' association said the average 30-year fixed-rate mortgage reached a record low of 3.38 percent in October.

"Rising home prices have already resulted in a $760 billion growth in home equity during the past year," Lawrence Yun, the association's chief economist, said in releasing the numbers. "Given that each percentage point of price appreciation translates into an additional $190 billion in home equity, we could see close to a $1 trillion gain next year."

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The "distressed" share of home sales has declined over the past year, to 24 percent of all transactions involving previously owned homes, the association says. About half of those distressed sales stem from foreclosures, and half from "short sales" in which lenders agree to accept less than a full payoff from borrowers.

The median time on market for previously owned homes was 71 days in October, down from 96 days a year earlier.