What’s wrong with this picture? Attracted by super affordable prices, buyer walk-in traffic is up and tons of prospective homebuyers are kicking tires across the nation during this spring sales season. Inventories are at record lows, which should strengthen prices if you believe in supply and demand. So why are sales plummeting and prices not rising as hoped?

NAR reported Friday that existing home sales are down 2.1 percent from last month, not necessarily a big deal until you realize those are March numbers when sales are supposed to rise. Prices, however, are not doing what is expected of them. The Campbell/Inside Mortgage Finance HousingPulse Tracking Survey says they are falling just when optimists had hoped spring sales would boost the housing economy into the black and begin the long awaited recovery. NAR had March prices up 2.5 percent over a year ago.

According to the Campbell survey, home prices for non-distressed properties fell 5.7 percent from March 2011 to March 2012. Prices for damaged REOs fell 5.7 percent and for move-in ready REOs, prices fell 2.5 percent during the same one-year period. And for short sales, prices fell 14.3 percent, year-over-year. The total share of distressed properties in the housing market in March, as represented by the HousingPulse Distressed Property Index (DPI), was 47.7 percent, using a three-month moving average. This was the 25th month in a row that the DPI has been above 40 percent. .

Both NAR and the Campbell survey report that the buyers are pounding the pavement and looking at houses. NAR’s monthly survey of Realtors found foot traffic up from 38 to 58 percent since the first of the year and the Campbell survey’s traffic indicies for current homeowners and investors last month were even higher than those recorded when the federal homebuyer’s tax credit was offered in 2009 and 2010.

Yet they’re not buying. NAR’s Lawrence Yun blames the low inventory. “We were expecting a seasonal increase in home listings, but a lack of inventory has suddenly become an issue in several markets with not enough homes for sale in relation to buyer interest,” Yun said. “Home sales could be held back because of supply factors and not by demand – we’re already seeing this in the Western states and in South Florida.”

Listed inventory is 21.8 percent below a year ago. HousingPulse found that real estate agents reported housing inventories well below levels seen a year ago, with an especially acute shortage of attractive properties in good locations. HousingPulse found that real estate agents reported housing inventories well below levels seen a year ago, with an especially acute shortage of attractive properties in good locations.

With nearly half of the market being distressed, we’re a long way from a return to a normal market,” said Thomas Popik, research director at Campbell Surveys. “Agents responding to our survey say that homeowners with well-maintained properties in good locations are very reluctant to list at today’s prices. That’s why inventory is low-and also why forced REO and short sales are such a big proportion of the remaining market.

So, inventories are low because sellers don’t want to list their homes when prices are so low. Low inventories are supposed to be a good thing because they strengthen prices. Instead, they are driving away demand because buyers don’t see anything they like. Also, as chary sellers pull out of the market, distress sales acquire too large a market share. Falling sales and too many distress sales combine to lower prices even more. So more sellers flee, inventories shrink even more, more buyers walk, sales fall more the distress sale market share gets even bigger, prices fall even farther. Go figure.