Tighter market conditions caused by negative equity and a higher level of distress sales are driving up prices three times faster among lower priced homes than expensive ones.

National home prices below 75 percent of the median increased 3.7 percent over a year ago compared to only a 1.8 percent increase for homes priced 125 percent or higher than the national median, according to an analysis by CoreLogic economist Sam Khater released today.

“Negative equity is keeping many potential sellers out of the market, which keeps a lid on inventory and complied with the reduced flow of REO properties has led to much tighter market conditions for lower priced properties, particularly in the hardest hit markets,” wrote Khater.

Of the largest 100 markets, the five fastest appreciating markets asre in states with the highest shares of negative equity coupled with high demand for distressed properties.

Areas where distressed inventory levels are high, such as Atlanta and Chicago have not yet staged a comeback.

Khater said the much larger rise in prices for lower-priced homes is improving the negative equity picture more than other price tiers because a higher percentage of lower priced homeowners are underwater,

“The price increased for lower priced, underwater properties are pushing these borrowers to lower loan to value segments?or closer to the surface.”

Khater cautioned that in today’s economy it will be difficult for prices to sustain their recent rate of acceleration, in light of the shadow inventory of foreclosures still in the wings.

“But for the moment, at least there is some positive news about negative equity’s impact on price increases in some markets,” he wrote.