Bob Major returned to Phoenix in October in search of more bargains like the four empty houses he bought in 2010 at rock-bottom prices. The retired builder from Vancouver, B.C., instead found real estate about 20 percent higher and stiff competition.

"There's been an extreme turn," Major said at a Chandler, Ariz., pizzeria, sitting beside his wife, Wendy. "We put bids on 30 properties and only got two."

The Phoenix housing market, down 55 percent from peak values with more than two-thirds of borrowers owing more than their properties are worth, is starting to recover as demand grows and inventory shrinks.

Sales rose in November for the 12th straight month on a year-over-year basis, and distressed real estate accounted for the smallest share of purchases since 2008, according to research firm DataQuick.

"The laws of supply and demand are finally taking hold," said Jim Belfiore, president of Belfiore Real Estate Consulting in Phoenix. "We've cleaned house. This market is poised to make a significant jump."

Values may increase 9 percent this year in Phoenix, as homes in or near foreclosure are bought up, according to Clear Capital. Bank-owned property, which made up two-thirds of sales at the May 2009 market trough, now accounts for only one-third, said Alex Villacorta, director of research at the real-estate data company in Truckee, Calif..

Pending foreclosures in Maricopa County, home to Phoenix, tumbled by almost two-thirds in two years to 18,325 this month, according to Mike Orr, publisher of the Cromford Report, a local housing-information service.

In December, first-time foreclosure filings in Arizona fell 41 percent from the previous month to the lowest since 2007, data firm RealtyTrac said.

"The pain was greater here," Orr said. "I think the reward for that is we'll be out of the woods faster."

Arizona's bank-owned inventory has shrunk relative to other hard-hit housing states partly because courts don't oversee property seizures, said Daren Blomquist, spokesman for Irvine, Calif.-based RealtyTrac.

It takes an average 125 days to complete a bank-owned home sale in Arizona, compared with 217 days in Florida, a "judicial state" with a foreclosure glut, according to the company. The U.S. average is 193 days.

The winnowing has boosted the average Phoenix property sale to $85 a square foot in December, up 7.6 percent from the market bottom in August, according to Orr, also the real-estate-center director at Arizona State University's W.P. Carey School of Business. Prices are still down from a peak of $190 a square foot in June 2006, he said.

"I never would have believed what Phoenix has gone through, but the data speaks for itself," said Karl Case, co-founder of an S&P/Case-Shiller home-price index that showed the metropolitan area as the only gainer among its 20 members in October (though prices fell in November). "When prices fall that much and interest rates are this low, it's got to be the case that the markets begin to clear."

The upturn follows more than five years of decline, the worst housing bust in a city where home construction for new residents has been the path to economic growth, Phoenix Mayor Greg Stanton said. .

Arizona lost about 324,000 jobs in three years — about one-third in construction — before employment bottomed in September 2010, U.S. Bureau of Labor Statistics data show. The state added about 45,000 jobs last year.

At that pace, it will take until 2015 to reach pre-bust levels, said Lee McPheters, director of Arizona State's JPMorgan Chase Economic Outlook Center.

Even with fewer foreclosures and prices turning, Phoenix has the sixth-highest U.S. metropolitan rate of foreclosure filings per household, according to RealtyTrac. Phoenix led the 25 largest U.S. metropolitan areas with two-thirds of its mortgaged homes in negative equity at the end of the third quarter, Zillow said.

Across the nation, 29 percent of all mortgaged homes were "underwater," meaning the properties were worth less than their loan balances.

Steep discounts have lured investors such as American Residential Properties, which used more than half a $100 million fund to buy 800 Phoenix-area homes for an average $120,000 each, some down from as much as $400,000 five years ago, said Laurie Hawkes, president of the Phoenix-based company. It's now teaming with New York-based Ranieri Partners on a proposal to buy repossessions from Fannie Mae and Freddie Mac and manage the properties as rentals.

"Phoenix appears to be leading the nation in terms of major metropolitan areas that are recovering," Hawkes said. "It's considerably faster than many people thought."

Bargain-hunting also attracted flocks of Canadians taking advantage of a 28 percent currency gain versus the U.S. dollar since March 2009 — and winters with an average January high of 66 degrees.

Canadians edged out Californians last year as the largest group of outside buyers, with 4.2 percent of purchases, Orr said.

Major, the retired Vancouver homebuilder, spent $400,000 for four properties during his 2010 investment foray, including a three-bedroom foreclosure he fixed up as his own winter residence. He plans to spend six months a year in Arizona.

"There were so many listings the first time, you could really take your pick," Major said. "Now you can't bargain nearly as much. The whole attitude is different."

A property similar to a house Major bought for $85,000 in 2010 sold in October for about $102,000, he said.

Stanton, a Democratic former city councilman who was elected mayor in November, said Phoenix needs to move from a reliance on housing cycles toward more sustainable jobs in technology and health care. His idea for a health and science development, to be built on 600 acres northeast of downtown, was announced in his Jan. 3 inauguration speech. "Being disproportionately dependent on single-family homes is the reason why this recession hit Phoenix so hard," said Stanton, himself the owner of an underwater house he purchased in April 2007.

The hoped-for employment shift may already be under way. Intel broke ground last year on a $5 billion plant in Chandler, about 20 miles southeast of downtown Phoenix, that will require "thousands" of temporary construction and permanent jobs, said Intel spokeswoman Laura Anderson. PayPal plans more hiring after adding 700 jobs in 2011, said Sara Gorman, a spokeswoman for the unit.

Even homebuilding has revived. Single-family construction permits are expected to climb to 11,300 this year, up 66 percent from a 2010 low, according to the average estimate of 13 Phoenix market analysts surveyed by Arizona State University.

Meanwhile, investors like Major peck away at the real-estate overhang. Time spent in his new $25,000 outdoor spa, the biggest cost of his foreclosure renovation, is a world away from frozen Canadian winters, he said.

"We like it at night before bed, when it's warm and all the stars are out," he said. "There's an awful lot of rain and dullness in Vancouver from October to April. And it's cold."