On Thursday, the Commerce Department reported that purchases of new homes, measured by contracts signed, increased 2.3 percent to a seasonally adjusted 454,000-unit annual pace last month, compared to the revised March rate of 444,000 units. This is the second best level since July 2008. Home sales are up 29.0 percent compared to April 2012. However, as the chart below shows, the real estate market is still well below its glory days.

The median estimate of 76 economists polled by Bloomberg only expected a gain of 425,000 units. Meanwhile, another survey by Reuters also called for 425,000 units.

The Commerce Department also reported the median sales price of new houses sold in April 2013 was $271,600, the highest level on record. The average sales price came in at $330,800. Although low interest rates and inventory levels have been supporting the real estate market, the average sales price of $279,900 in March was the lowest since June 2012.

The seasonally adjusted estimate of new houses for sale at the end of April was 156,000 units. This represents a supply of 4.1 months at the current sales rate, near record lows. The all-time high for supply hit 12.1 months in January 2009.

Shortly after the report, housing-related stocks such as Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) dropped about 1.5 percent. However, home builders such as Toll Brothers (NYSE:TOL) and Lennar (NYSE:LEN) both climbed higher.

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“The housing market has stabilized in many areas and homebuilding activity has strengthened in recent quarters,” commented FHFA Principal Economist Andrew Leventis. “That said, labor market weakness and still-elevated foreclosure pipelines remain hindrances to a more robust recovery.”

Like every other part of the economy, and in-line with the market fixation on monetary policy, the Fed’s quantitative easing and the headline unemployment rate that it’s chained to are key components in the housing recovery. Central bank easing has put downward pressure on interest rates, ostensibly increasing buying power in the market and assisting the climb in prices.

The latest reading from the Standard & Poor’s/Case-Shiller index showed a 9.3 percent jump in home prices for February, compared to the prior year. Home prices in 20 major metropolitan areas rose at their fastest rate since May 2006, and beat expectations calling for a 9 percent gain. In fact, all 20 cities posted year-over-year gains for the second consecutive month, which has not happened since 2005. The Case-Shiller index is non-seasonally adjusted and uses a three-month average.

Source: Federal Housing Finance Agency

The housing market recovery has been repeatedly cited as a bright spot in the beleaguered U.S. economic recovery. President Barack Obama mentioned it in his State of the Union address and has pointed to it several times since as one of the pillars of domestic growth. But while climbing prices and sales validate this claim, there is concern among some market watchers that another housing bubble could be inflating.

Due to the rebound in home prices, Trulia (NYSE:TRLA) has launched a feature called Trulia Bubble Watch. The new housing market indicator tracks whether home prices are in or nearing bubble territory by measuring how home prices are valued relative to their fundamentals. It gauges the housing market across the nation by looking at 100 of the largest metro areas.

According to Trulia, national home prices are still 7 percent undervalued. In comparison, the housing bubble of yesteryear saw home prices become overvalued by almost 40 percent in the first quarter of 2006. After the bubble popped, home prices became 15 percent undervalued in the fourth quarter of 2011. However, certain areas of the country are seeing houses become overvalued.

Source: FHFA, Honolulu, HI is not pictured.

The Trulia Bubble Watch finds that eight of the 100 largest metro areas have home prices above their fundamental value, with half of those being located in California. Cities such as Orange County, Los Angeles, San Jose, and San Francisco are all seeing home prices heat up, but still remain well below their pre-crisis peaks. Texas metros such as Austin, San Antonio, and Houston are also overvalued when compared to the fundamentals. Portland, Oregon rounds out the list.

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On Wednesday, the National Association of Realtors announced that total existing-home sales, which are completed transactions that include single-family homes, town-homes, condos, and co-ops, increased 0.6 percent to a seasonally adjusted annual rate of 4.97 million units in April. In comparison, March showed an upwardly revised 4.94 million units.

Existing-home sales are up 9.7 percent from the 4.53 million-unit level seen in April 2012. Sales are at their highest level since the tax credit period of November 2009, when sales spiked to 5.44 million units. Total sales have now been above year-ago levels for 22 consecutive months.

Lawrence Yun, NAR chief economist, remains upbeat. He says, “The robust housing market recovery is occurring in spite of tight access to credit and limited inventory.  Without these frictions, existing-home sales easily would be well above the 5 million unit pace. Buyer traffic is 31 percent stronger than a year ago, but sales are running only about 10 percent higher. It’s become quite clear that the only way to tame price growth to a manageable, healthy pace is higher levels of new home construction.”

Single-family home sales in April rose 1.2 percent to a seasonally adjusted annual rate of 4.38 million units, compared to 4.33 million units in March. On a regional basis, existing-home sales in the Midwest fell 3.4 percent. However, sales in the Northeast, South, and West increased 1.6 percent, 2.0 percent, and 1.7 percent, respectively.

Low inventory levels continue to support home prices. The national median existing-home price for all housing types jumped 11.0 percent to $192,800 in April, compared to a year earlier. This is the 14th consecutive month of year-over-year price gains. The last time this occurred was April 2005, during the housing bubble.

Total housing inventory at the end of April rose 11.9 percent to 2.16 million existing homes available for sale, representing a 5.2-month supply. This is above the 4.7-month supply in the previous month.

In a separate report from the Mortgage Bankers Association, loan application volume dropped 9.8 percent on a seasonally adjusted basis from one week earlier. This comes as the average interest rate for a 30-year fixed-rate mortgage climbed higher for the second consecutive week to reach 3.78 percent.

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Due to the rebound in home prices, Trulia has launched a feature called Trulia Bubble Watch. The new housing market indicator tracks whether home prices are in or nearing bubble territory by measuring how home prices are valued relative to their fundamentals. It gauges the housing market across the nation by looking at 100 of the largest metro areas.

According to Trulia, national home prices are still 7 percent undervalued. In comparison, the housing bubble of yesteryear saw home prices become overvalued by almost 40 percent in the first quarter of 2006. After the bubble popped, home prices became 15 percent undervalued in the fourth quarter of 2011. However, certain areas of the country are seeing houses become overvalued.

The Trulia Bubble Watch finds that 8 of the 100 largest metro areas have home prices above their fundamental value, with half of those being located in California. Cities such as Orange County, Los Angeles, San Jose, and San Francisco are all seeing home prices heat up, but still remain well below their pre-crisis peaks. Texas metros such as Austin, San Antonio, and Houston are also overvalued when compared to the fundamentals. Portland, Oregon, rounds out the list.

“Home prices fell so much after the last bubble burst that they still remain below normal levels even as prices rise sharply today,” said Jed Kolko, Trulia’s Chief Economist. “Several forces are waiting in the wings that should slow down today’s rapid price gains before they rise into bubble territory again. More inventory, higher mortgage rates, and fading investor activity would each take home-price gains down a notch.”

The latest reading from the Standard & Poor’s/Case-Shiller index showed a 9.3 percent jump in home prices for February, compared to the prior year. Home prices in 20 major metropolitan areas rose at their fastest rate since May 2006, and beat expectations calling for a 9 percent gain. In fact, all 20 cities posted year-over-year gains for the second consecutive month, which has not happened since 2005. The Case-Shiller index is not seasonally adjusted and uses a three-month average.

Meanwhile, a separate report from CoreLogic shows that home prices across the nation increased 10.5 percent year-over-year in March, the biggest gain since March 2006 and the thirteenth consecutive monthly increase.

Kolko warns, “Although we’re far from bubble territory today, there’ll be another home-price bubble someday, somewhere. The history of American real estate is full of speculation, bubbles, and busts. Even now, most people expect home prices to get back to the peak of the previous bubble again in the next 10 years. Prices may be far from bubble levels today, but we need to stay on guard for signs of the next bubble.”

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According to the Thomson Reuters/University of Michigan’s preliminary reading, consumer sentiment in early May rose to 83.7, compared to 76.4 in April. This is the highest level for the index since July 2007. The median forecast in a Bloomberg survey called for a modest increase to 77.9. In fact, the preliminary reading beat every estimate in the survey.

During the last recession, the index averaged slightly above 64. In the five years before the financial crisis, it averaged almost 90. Consumer sentiment is one of the most popular measures of how Americans rate financial conditions and attitudes about the economy. The University of Michigan’s Consumer Survey Center questions 500 households each month for the index.

The reading on current economic conditions, which measures whether Americans think it is a good time to make large investments, jumped from 89.9 in April to 97.5 in May, the highest level since October 2007. Meanwhile, consumer expectations improved from 67.8 to 74.8.

More consumers are feeling better about their personal finances, but the largest gains were among households in the upper third income levels, as stocks continue to hit fresh all-time highs and home prices rebound. Affecting all households, the average price of a gallon of gas has also declined in recent weeks.

Earlier this week, Bloomberg’s gauge on consumer comfort hit a five-month high, providing hope that the American consumer is finding ways to survive. Mike Englund, chief economist at Action Economics, tells Bloomberg, “We’ve got a consumer that’s been stunningly resilient to tax hikes and sequestration. It’s not an optimistic consumer, but it’s a resilient one.”

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Source: Federal Housing Finance Agency

On Monday, the National Association of Realtors reported that total existing home sales — defined as completed transactions involving single-family homes, town homes, condominiums, and co-ops — declined 0.6 percent on the month to a seasonally-adjusted annualized rate of 4.92 million in March. February’s annualized rate was downwardly revised to 4.95 million. That said, March’s rate was 10.3 percent higher than the year-ago period. Sales have no been above year-ago levels for 21 consecutive months…

NAR data also showed that home prices are up 6.2 percent on the month and 11.8 percent on the year, making the strongest increase in the post-crisis era. Low sales and high prices suggests that there is more supply than demand in the market. Given this situation, higher prices are likely to bring more homes to market in April.

Data from Freddie Mac show that the monthly average commitment rate on a 30-year fixed-rate mortgage edged up 0.4 points in March to 3.57 percent. This is still below the annual average for 2012 of 3.66 percent, but is the third consecutive month the average rate has increased.

Source: Freddie Mac

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Total existing home sales — defined as completed transactions involving single-family homes, town homes, condominiums, and co-ops — declined 0.6 percent on the month to a seasonally-adjusted annualized rate of 4.92 million in March. February’s annualized rate was downwardly revised to 4.95 million. That said, March’s rate was 10.3 percent higher than the year-ago period. Sales have no been above year-ago levels for 21 consecutive months.

The data also revealed that home prices are up 6.2 percent on the month and 11.8 percent on the year, making the strongest increase in the post-crisis era. Low sales and high prices suggests that there is more supply than demand in the market. Given this situation, higher prices are likely to bring more homes to market in April.

Total housing inventory at the end of March increased just 1.6 percent in March to 1.93 million existing homes available for sale. This represents a 4.7-month supply at the current rate. The national median price for an existing-home sale climbed 11.8 percent on the year and 6.2 percent on the month to $184,000.

Source: National Association of Realtors

“Buyer traffic is 25 percent above a year ago when we were already seeing notable gains in shopping activity,” commented NAR Chief Economist Lawrence Yun. “In the same timeframe housing inventories have trended much lower, which is continuing to pressure home prices. The good news is home construction is rising and low mortgage rates are continuing to keep affordability conditions at historically favorable levels. The bad news is that underwriting standards remain excessively tight, while renters are getting squeezed by higher rents.”

Data from Freddie Mac show that the monthly average commitment rate on a 30-year fixed-rate mortgage edged up 0.4 points in March to 3.57 percent. This is still below the annual average for 2012 of 3.66 percent, but is the third consecutive month the average rate has increased.

Here’s how the market traded Monday:

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Bubbles typically take a very long time to make a significant comeback. For example, gold made a peak in 1980 then crashed and remained dormant until 2001. The tech bubble still has the Nasdaq trying to recover its highs reached over a decade ago. Most recently, home prices peaked in 2006 and started their infamous plunge. A great deal of measures have been implemented by the Federal Reserve to re-inflate the housing bubble, and it is causing reason for concern.

The central bank has manipulated interest rates to historic lows, which distorts many parts of the economy. Record low mortgage rates are hiding the fact that homes are more expensive than historic norms relative to annual incomes, according to Zillow researchers…

The affordability index, which measures the percentage of a homeowner’s monthly income devoted to mortgage payments, averaged 19.9 percent from 1985 through 1999. At the end of last year, this figure fell to 12.6 percent, or about 37 percent below the historical norm. However, the price-to-income ratio, which looks at the total price of a home relative to the median annual income, is on the rise.

Historically, the median home in the United States cost 2.6 times as much as the median annual income. Today, the ratio is closer to 3.0 and low interest rates and stagnant wages have pushed the ratio above the historical average in 24 of the 30 largest metros covered by Zillow.

Metros with the largest difference between their pre-bubble and fourth quarter 2012 price-to-income ratios include San Jose, Los Angeles, Portland, San Diego, and Denver.  Metros with a ratio below the historic norm include Cincinnati, Chicago, Cleveland, Atlanta, Las Vegas, and Detroit.

The days of cheap housing are numbered…

“The days of historically high levels of housing affordability are numbered,” said Zillow Chief Economist Stan Humphries. “Current affordability is almost entirely dependent on low interest rates, and there’s no doubt that rates will begin to rise in the next few years. This will have an undeniable effect on demand for housing, as home buyers will have to spend more of their incomes to buy a home. Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets. This will especially be the case in some markets that have seen strong home value appreciation.”

Home prices have been showing strength recently. According to the S&P/Case-Shiller index, home prices in 20 major metropolitan cities rose 8.1 percent in January from a year earlier, the biggest jump in more than six years. The index even avoided the usual winter slowdown in January and December. CoreLogic, a real estate data provider, reported that home prices surged 10.2 percent year-over-year in February, its biggest gain since March 2006. This trend may feel good now, but could easily inflict financial pain down the road.

Record low interest rates have also been a catalyst for home-related stocks. Shares of homebuilders such as PulteGroup (NYSE:PHM) and Toll Brothers (NYSE:TOL) have surged 74 percent and 62 percent over the past three years, respectively. Home Depot (NYSE:HD) shares have more than doubled in the same period.

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There is clearly a difference in the type of recovery taking place on Wall Street and Main Street. Stocks have recaptured their previous highs made more than five years ago, but home prices are still well below their glory days of the housing bubble. As a result, almost 60 percent of Americans believe the nation is still in the midst of a housing crisis, according to a new report sponsored by the MacArthur Foundation. Nearly 20 percent of those polled said the worst is yet to come.

As the chart above shows, the view on housing was relatively stable across all regions. Eighty percent of Southerns said the nation is in the middle of the housing crisis, the highest of any region. The Midwest came in at the lowest with 73 percent. Overall, only 20 percent of Americans believe the crisis is pretty much over.

Americans feel better about their own situation…

Amid low inventory levels and a very accommodative monetary policy at the central bank, hopes of a recovery are appearing. CoreLogic recently reported that U.S. home prices jumped 10.2 percent in February, compared to a year earlier. This was the largest gain since March 2006. Furthermore, Trulia (NYSE:TRLA) reported that asking home prices increased 7.2 percent year-over-year last month. Housing-related stocks such as Home Depot (NYSE:HD) and Lowe’s (NYSE:L) have also rallied strongly over the past year as more owners feel confident about spending money on home improvements.

The rebound has led to a more upbeat view on how Americans view their own personal futures. The MacArthur Foundation report finds that seven in 10 Americans are optimistic about their own future, while only 27 percent say they are pessimistic. In comparison, 63 percent say they are worried about what the next five years hold for the country. The budget deficit and jobs are leading concerns, but half of those polled say the housing market is a very or fairly serious problem.

The view is changing on renting vs buying…

While renting has been seen as an undesirable choice in the past, it is gaining momentum. In the wake of the housing crisis, 57 percent of Americans say buying a home has become less appealing, compared to 27 percent saying it has become more appealing. On the other hand, 54 percent of Americans say renting has become more appealing, with only 24 percent saying it is less appealing.

Remarkably, home ownership is still a goal for many renters. Seventy-two percent of renters say they aspire to own a home one day, while only 26 percent say that home ownership is not a desire. Eighty-four percent of renters under 40 years old say they aspire to own a home.

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Home prices did not increase in all parts of the United States, but they certainly did in most regions. Only 3 states failed to report increased home prices: Delaware, Alabama, and Illinois. In addition, of the 100 largest metropolitan areas in the U.S., only 4 failed to report increases.

The Western U.S. lead the gains, reporting the highest numbers. Nevada saw home prices jump 19.3 percent year-on-year in February, Arizona rose 18.6 percent, California hit 15.3 percent, and Hawaii reached 14.6 percent, while Idaho trailing the group with a 13.5 percent increase. Phoenix, Los Angeles, Riverside, California, Atlanta, and New York lead the metropolitan-area gains.

The national gains were evident on both a year-on-year and month-on-month basis, and they were also the twelfth consecutive month of home prices, beating their year-earlier counterparts. This shows steady momentum for the housing recovery…

The national average rise in home prices in February was 10.2 percent from the year-ago period,  making it the largest such gain in 7 years — though prices were still down 26 percent from where they stood at their peak in April 2006. Home prices were up 0.5 percent from January, even though winter is usually a season when sales are usually slower.

Not everything was quite so positive though. Home sales to first-time buyers were still at unhealthily low levels, although this negativity was perhaps countered by the bigger increase in the sales of previously owned homes, which reached its highest level in over 3 years. Available for-sale homes were also low, and may have been a contributing factor in the increase in home prices: simply supply and demand pricing.

Despite still being low, the actual supply of for-sale homes did rise for the first time in 10 months in February.

The effects of increasing home prices could spread throughout the rest of the economy, as homeowners may feel more comfortable and wealthier with their home as an asset, and that may drive them to increase spending. Considering that 70 percent of economic activity is driven by consumer spending, the butterfly effect of increasing house prices could surge through the economy if they keep rising.

The increasing prices could even affect the actual sales of homes, as many people who were on the fence before might try to quickly buy a home in anticipation of prices going up even further. And, their purchases could reduce the number available homes and actually be a cause for a further increase in home prices.

Here’s how the 3 major indices reacted to the news today:

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