Housing conditions in Texas such as shrinking inventories are supporting higher prices in the state, and all indicators suggest that prices are on the upswing, according to the Federal Reserve Bank of Dallas.

Inventories below 6.5 months are historically consistent with rising home prices. Texas inventories of single-family homes are at 5.5 months of supply at the current sales pace.

North Texas home sales jumped 18% over last year in August, making it the eighth consecutive month of annual sales increases.

Apartment demand in the Lone Star state has been elevated since 2010, leading to rapidly rising rents in major metro areas, business economist D'Ann Petersen says. Anecdotal evidence from Dallas Fed business contacts indicates apartment rental rates are high enough in some Texas metro areas to push renters or potential renters into the single-family market.

And Texas residential construction emerged from the deepest downturn in recent history. Tight new-home inventories and low apartment vacancies mean construction levels should continue rising if current demand is sustained, Petersen says.

"With the uptick in construction in the first half of the year, even a modest increase in the level of new home and apartment construction in the remainder of 2012 would mean an additional stimulus that was missing from the state’s economy in 2011," Petersen writes in the Dallas Fed’s latest issue of Southwest Economy.