The inventory of unsold homes in San Francisco was at its lowest level in more than two years in August, according to the San Francisco Association of Realtors and the Rosen Consulting Group. There was a 2.6-month supply of homes in August, down from the peak of 5.8 months' supply last November. The monthly supply is derived from the number of homes for sale on the last day of the month, divided by the number of homes that went into contract during the same month. In other words, it's the months of supply based on the current contract rate. “A low months of supply number, such as we have now, is a sign of a tight housing market and usually signals rising prices lie ahead,” said Ilse Cordoni, the association’s president. The decrease in supply was driven by low mortgage rates, federal incentives and improved affordability, which have all brought buyers into the San Francisco market. But prices declined in August to $705,000, down 9.7% from July 2009 and down 14.5% from August 2008. Since market supply is derived by properties that are in contract, but not closed, there is a lag between the two metrics, Cordoni said. The supply of condos is also declining in the region, and there is now a 3.4-month supply, down from a 10.4-month supply in November 2008. The median price increased 12.5% from July to $680,000. Write to Austin Kilgore.