Home prices are soaring at a pace not seen since the housing boom, giving a much-needed boost to the larger economy.
The rebound is helping homeowners recover losses from the crash and giving them confidence to spend. And that's raising the fortunes of banks, builders and investors — all reflected in a Tuesday rally on Wall Street.
Home prices rose 10.9% in March compared with the same month last year, according to the Standard & Poor's/Case-Shiller index of 20 U.S. cities. Fueled by strong demand and tight supply, that was the strongest annual jump since April 2006.
The real estate market has emerged once again as the driver of economic optimism, sorely needed to pick up the slack left by weak government spending, economists said.
Home prices will keep accelerating this year and next year because of home shortages, said economist Patrick Newport of IHS Global Insight. But he advised caution in joining the fray of home buyers.
"Whenever you see double-digit increases, human psychology starts kicking in," Newport said, which could cause some markets to overheat and risk another price crash.
The Case-Shiller index, created by economists Karl E. Case and Robert J. Shiller, is widely considered the most reliable read on home values. The housing index compares the latest sales of detached houses with previous sales and accounts for factors such as remodeling that might affect a home's sale price over time.
On an annual basis, every metro area tracked by the index has posted year-over-year gains for three consecutive months. The Phoenix area had the largest annual gain — up 22.5% in March. San Francisco posted a 22.2% gain. Once-downtrodden metro areas showed huge jumps, with Las Vegas up 20.6%; Atlanta, 19.1%; Detroit, 18.5%; and Los Angeles, 16.6%.
So far, the increases have served to make up for some of the severe losses suffered during the bust. The 20-city home price index remains about 28% off its bubble-era peak and matches the level of late 2003.
Western cities are leading the rally. But home prices in some areas are outpacing fundamentals such as employment gains and increases in real wages. That's particularly true in many California cities, including Los Angeles, according to commentary issued Tuesday by credit rating firm Fitch Ratings.
"In cities that never fully unwound the mid-2000s bubble, rapidly increasing price levels are a potential cause for concern," the Fitch analysts wrote. "For example, in Los Angeles, prices are up more than 10% in the past year despite a stubborn unemployment rate that remains above 10% and real incomes that have declined over the past two years."
The housing recovery began last year as foreclosures waned and buyers chased perceived home bargains and low interest rates. Investors, meanwhile, have snapped up homes on the cheap to either flip or rent out. Growing confidence in the recovery has unleashed pent-up demand from buyers waiting out the crash.
"We believe this level of housing demand is likely to abate once the pent-up demand is satisfied," the Fitch analysts wrote.
Rising home prices have boosted spirits on Main Street and Wall Street.
Consumer confidence surged this month to its highest level in more than five years as optimism increased about the state of the economy and its prospects for the rest of the year, according to a closely watched private barometer released Tuesday.
The Conference Board's consumer confidence index jumped to 76.2 in May from the previous month's upwardly revised reading of 69. The last time the index was this high was in February 2008, at the start of the Great Recession.
The index now has risen two straight months after plunging in March amid concerns about the effect of tax increases that kicked in at the start of the year as well as the federal budget cuts known as sequestration.
"Back-to-back monthly gains suggest that consumer confidence is on the mend," said Lynn Franco, director of economic indicators at the Conference Board.
The percentage of consumers saying business conditions were good increased to 18.8% this month, from 17.5% in April. And the percentage of consumers who said jobs were plentiful rose to 10.8%, from 9.7%.
Wall Street rejoiced at the reports on housing and consumer confidence, driving stocks up more than 1% in early trading after a rally in global markets. Investors pulled back later in the day, and the Dow Jones industrial average ended the day up 106.29 points, or 0.69%, to 15,409.39. The broader Standard & Poor's 500 index climbed 10.46 points, or 0.63%, to 1,660.06, and the tech-heavy Nasdaq gained 29.75 points, or 0.86%, to 3,488.89.
The rally signals that investors are looking to economic growth, not just easy money from the Federal Reserve.
Investors are not "excited about a handout anymore," said Sam Stovall, chief equity strategist for S&P Capital IQ. "The excitement is coming from organic growth."
The Federal Reserve's monetary stimulus programs have fueled a run-up in stocks this year. The central bank has continued to pump cheap money into the system. The aim is to lower interest rates to make borrowing cheaper and stimulate growth. In doing so, the Fed has made safer investments such as bonds less attractive and lured investors into riskier assets such as stocks.
Many on Wall Street have been expecting a pull-back or correction of 10% or more in stocks during the second quarter. But with May almost in the rear-view mirror, any significant halt in the rally has to wait until next month.