There's an odd trend going on in the housing market. While sales volumes are falling precipitously across the board, home prices keep going up. What gives?

The answer to this question is simple. Like any other good or service, the price of a house is set by supply and demand. If supply is high relative to demand, prices will typically fall, and vice versa. More specifically, the critical threshold to watch in the housing market is the supply of listed homes versus the monthly rate of sales. If the supply of listed homes is less than six months' worth of sales, prices typically rise. If the supply is greater than that, prices will fall.

So, where are we right now? According to the National Association of Realtors' latest data, the current supply of homes for sale is equivalent to 5.2 months' worth of sales. It's for this reason, as Motley Fool contributor John Maxfield discusses in the video below, that the housing market seems to be giving off otherwise conflicting signals.

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