Generally speaking, fall is slower than summer for real estate in the U.S. With kids off from school and weather more conducive to house-hunting, summer is the most practical time for many families to move, so it's no surprise that roughly half of all home sales take place during that season.

House For Sale

Source: Flickr.

However, one factor that we haven't had to deal with for a few years could boost home sales this fall. Houses might actually get cheaper throughout much of the nation; combined with low mortgage rates, this could produce more of a buyers' market in the latter portion of the year.

The price gains of the last few years are troubling
As you can see from the chart below, home prices in the U.S. on average increased by about 25% in just two years after bottoming out in early 2012. Prices have recently leveled off, which indicates the rise could have been too far, too fast.

Case-Shiller Home Price Index: Composite 20 Chart

I'm not sure if I would necessarily call these gains "unhealthy," since they came on the heels of a housing collapse, but they're definitely unsustainable. In a healthy real estate market, gains of 3%-5% per year are to be expected, just like the steady rise we saw for much of the 1990s.

US House Price Index Chart

Much of the gains over the past few years were caused by very low mortgage rates and the high rate of home foreclosures, which together triggered a flurry of buying and thereby drove prices up. However, the inventory of foreclosures has been steadily drying up, and is thus becoming less of a contributing factor.

Although mortgage rates remain quite low on a historical basis, the rapid gains in price have pushed homeownership out of the realm of affordability for many Americans. It doesn't even matter if you can get a house at 0% interest -- if it's too expensive, it's too expensive. Period.

Where are the buyers? 
The latest data on mortgage applications is particularly alarming. Application volume fell by more than 7% during the week ended Sept. 5 from the previous week, to the lowest level in nearly 14 years. Think about that for a second.

This implies that fewer mortgage applications are being submitted than at any given time during and after the mortgage crisis, when credit was extremely tight and very few buyers were in the market.

Refinancing applications also dropped by 11% in that same one-week period, to the lowest level since November 2008. Applications to purchase homes are now 12% lower than they were at this time last year. Mortgage rates did indeed increase slightly over the past week or so, but not nearly enough to warrant this decline in activity.

The story of supply and demand
Right now we have two opposing forces at work: an oversupply of homes for sale and a dwindling number of buyers.

On one hand, the mortgage application data shows that not only is the summer selling season over, but there are fewer buyers seeking mortgages than any time since the year 2000.

On the other hand, the latest data indicates that the inventory of existing homes on the market has risen by about 26% so far in 2014, while the rate of existing home sales has only increased by 11%.

US Existing Home Inventory Chart

At the current sales rate, there are six months of inventory on the market, up from five at the beginning of the year.

In addition, a lot of new houses are being built. In July, housing starts surged by 15.7% year-over-year , and homebuilder confidence is at a 2014 high. Permits for new homes also rose by 8.1% for the month, compared to last year, indicating that more new construction projects are yet to be started.

This combination is very likely to produce lower home values. Sellers whose homes are still sitting on the market after the mediocre summer season might be forced to lower their asking price or accept significantly less than the listing price.

However, this isn't necessarily a bad thing; instead, it is simply a healthy correction after the housing recovery got a little overheated. In fact, there would be more cause for concern if home values continued their upward trajectory, as that could easily produce another bubble. Look for home prices to fall slightly until the market reaches equilibrium, and then begin slower, more sustainable gains as interest rates start to rise once again and the U.S. economic recovery continues.

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