Home prices in the Twin Cities posted a record gain in April, outpacing the recovery in most parts of the nation and revealing the strength of the local economy.
Values in the metro area jumped 14.8 percent over last year, according to the closely watched Standard & Poor's Case-Shiller home price index. The 13-county region was one of four major U.S. metro areas to post record gains during the month. Nationally, home prices were up 12 percent.
"Prior to 2012, things weren't good in the Twin Cities," said David Blitzer, chairman of S&P's index committee.
"Recent price gains have definitely been superior."
A key turning point for the Twin Cities is the vast decline in the number of distressed sales. During 2011, the Twin Cities area was flooded with foreclosures, which put pressure on prices because repossessed homes usually sell for a fraction of a traditional property.
Now that the economy is recovering, homeowners are more willing to test the market and are increasingly getting the asking prices for their homes. That, combined with an overall shortage of homes, is driving up values in many neighborhoods.
"It's a seller's market now, and part of that is driven by historically low supply," said Herb Tousley of the Shenehon Center for Real Estate at the University of St. Thomas.
With inventory so scant, bidding wars have become widespread among area buyers, sometimes resulting in sales that actually exceed asking prices.
The St. Thomas Residential Real Estate Price Report shows that the median sale price of a traditional home in the Twin Cities in May was $220,000, a 7.3 percent increase over last year.
Meanwhile, the Case-Shiller index stood at 133.46 in April, which means that Twin Cities home prices are now 33.46 percent higher than they were when a base value of 100 was established in January 2000.
New-home sales up across U.S.
In yet another sign of a strengthening economy, the U.S. Commerce Department said Tuesday that new home sales during May rose 2.1 percent to a seasonally adjusted annual rate of 476,000, the highest level since July 2008.
Analysts say the latest reports show just how important housing is to a broader economic comeback.
In fact, stronger sales have led to a significant boost in home construction in the Twin Cities, with the number of building permits up double digits over last year.
Still, analysts say the stronger housing numbers come with a level of risk.
Some suggest that home prices could be rising too quickly, creating another real estate bubble that could once again cripple the market.
For now, those worries are being tempered by recent increases in mortgage rates.
On Tuesday, Zillow said the average 30-year fixed mortgage rate rose 50 basis points to 4.38 percent. Last week the rate averaged 3.88 percent.
That's the highest rate since July 2011, but still far below historic averages.
Erin Lantz, director of Zillow Mortgage Marketplace, said rates spiked in the wake of Federal Reserve Chairman Ben Bernanke's comments about the Fed's commitment to scale back its stimulus program later this year.
"This coming week, we expect rates will be volatile as the market recalibrates and determines whether we've reached a new plateau near 4.5 percent or whether this week's rate spike was an overreaction that warrants a downward adjustment," said Lantz.
Blitzer said the housing recovery should continue even with mortgage rates rising.
"Home buyers have survived rising mortgage rates in the past," Blitzer said, "often by shifting from fixed-rate to adjustable-rate loans."
Blitzer said the bigger issue for the housing market is banks' willingness to lend.
A recent survey by the Fed suggested that some banks are easing credit standards.
Tousley and other experts say price gains in the Twin Cities and beyond will moderate as the inventory increases.
"First, there are very few homes on the market for this time of year — about 13,000 versus up to 20,000 we see traditionally," Tousley said.
"But rising prices will bring more homes for sale into the market, creating a better balance between supply and demand."
The Associated Press contributed to this report.