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Home prices soar in April, leading to warnings of another bubble

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"I would be stunned if we keep going at this pace," said Richard Green, director of the USC Lusk Center for Real Estate.

Home prices in large U.S. cities rose sharply in April, posting the biggest one-month gain in the history of a leading U.S. home price index.

The Standard & Poor's/Case-Shiller index of 20 large U.S. cities rose 2.5% over March and 12.1% from April 2012. Every city tracked by the measure has now posted at least four consecutive months of year-over-year increases, indicating a broad and robust real estate recovery.

Prices have risen so quickly in certain markets — including Los Angeles, San Diego and San Francisco — that some economists are warning of another housing bubble. San Francisco posted the biggest year-over-year gain, a whopping 23.9%.

Home prices can't continue at this breakneck pace for long without accompanying growth in jobs and wages, economists said. Relatively tight access to mortgage credit should also put a check on runaway prices.

"I would be stunned if we keep going at this pace," said Richard Green, director of the USC Lusk Center for Real Estate.

Other data released Tuesday confirmed strength in housing. Sales of newly built homes surged more than expected in May, a good sign for a building sector that has an outsized role on the broader economy.

Sales of new single-family homes rose 2.1% from April to a seasonally adjusted annual rate of 476,000, the Commerce Department said. That was the highest rate since July 2008 and 29% more than May 2012.

The housing recovery began in earnest last year as foreclosures tapered off and buyers chased deals on homes and mortgages. Investors, including well-heeled Wall Street financiers, have snapped up many of the cheapest homes to either flip or rent out. The sudden interest has tightened housing supply, leading to frenzied bidding wars in the hottest markets and fast-rising prices.

Southern California cities also posted sharp annual gains. Los Angeles was up 18.8% since April 2012; San Diego rose 14.7%.

Atlanta, Dallas, Detroit and Minneapolis posted their biggest annual increases since the start of their respective indexes. All cities except Detroit posted positive monthly gains. The composite index for all cities posted its largest year-over-year gain in seven years.

The index, created by economists Karl E. Case and Robert J. Shiller, is one of the most widely followed gauges of 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 house's price over time.

A big factor driving prices is simple supply and demand. Construction of single-family homes has been subdued since late 2007, while the U.S. population has grown more than 12 million since the end of that year, IHS Global Insight economists Patrick Newport and Stephanie Karol noted in a written analysis.

"As prices go up, more homeowners will list their homes, which will reduce the shortages somewhat — but not by much," they wrote. "There are simply not a lot of empty homes in places where people want to live. Eliminating shortages, thus, will require new construction."

Eric Sussman, a lecturer at the UCLA Anderson Graduate School of Management, described the price increases as good, but not likely to continue through the year. The housing market's continued recovery will depend on the success of the broader economy, he said.

Rising mortgage interest rates also remain a wild card. A surge in rates — which have jumped 1 percentage point from their recent bottom — can get certain buyers off the fence and create short-term demand for housing, pushing up prices further. But Sussman said they will also undoubtedly push out many shoppers who can no longer afford homeownership.

"The biggest head wind that I see is unpredictability in interest rates — that can have a really quick and immediate effect," he said. "People have to be confident, secure and feel like the cost of their mortgages are locked in at a good rate."

Dean Baker, co-director of the Center for Economic and Policy Research, warned that price increases in California cities could be reaching "bubble levels of appreciation."

"Grounds for concern, I would not necessarily say a bubble," he said. "If this goes on at anything like this pace for five or six months, you are definitely going to have some serious bubbles."