Residential real estate prices increased in January by the most since June 2006, indicating the U.S. housing market strengthened at the start of the year.

The S&P/Case-Shiller index of property values in 20 cities climbed 8.1 percent in January from the same month in 2012 after rising 6.8 percent in the year ended in December, the group said today in New York. The increase exceeded the 7.9 percent median forecast by economists in a Bloomberg survey.

Improving home values will lure more buyers into the real estate market by inducing current owners to put their properties up for sale and prompting builders to begin work on new dwellings. Historically low lending rates and a stronger labor market have helped fueled the rebound in housing, which is a source of strength for the economy.

“The housing market is looking pretty positive,” David Sloan, senior economist at 4Cast Inc. in New York, said before the report. Sloan was the best forecaster of homebuilding in the past two years, according to data compiled by Bloomberg. “Recently the pickup in demand has been so strong that it’s gone ahead of supply, and that’s made prices firm. People see house prices rising and think it might be a good time to buy.”

Estimates for the year-over-year price change ranged from increases of 6 percent to 8.9 percent, according to forecasts from the 30 economists surveyed. The Case-Shiller index is based on a three-month average, which means the January figure was influenced by transactions in December and November.

Home prices adjusted for seasonal variations rose 1 percent in January from the prior month after a 0.9 percent gain in December. Phoenix and San Francisco showed the biggest adjusted monthly increases, with prices climbing 1.9 percent in both metropolitan areas. Atlanta posted a 1.8 percent gain, while values advanced 1.7 percent in both Las Vegas and Tampa, Florida.

Unadjusted Gain

Unadjusted prices advanced 0.1 percent in January from the previous month as nine of 20 cities showed an increase.

The year-over-year gauge provides better indications of trends in prices, according to the S&P/Case-Shiller group. The panel includes Karl Case and Robert Shiller, the economists who created the index.

All 20 cities in the index showed a year-over-year increase, led by a 23.2 percent surge in Phoenix. The change in home prices in New York, up 0.6 percent, turned positive after declining during the previous 28 months.

“Economic data continue to support the housing recovery,” David Blitzer, chairman of the S&P index committee, said in a statement. “Steady employment and low borrowing rates pushed inventories down to their lowest post-recession levels.”

Housing Inventory

There were 1.77 million previously-owned properties on the market in January, the fewest since 1999, according to data from the National Association of Realtors. The supply of homes for sale rose to 1.94 million in February, more than a million units less than the average in the five years leading to the 2007-2009 recession.

Price data from the NAR showed the median value of a previously-owned home climbed to $173,600 in February, up 11.6 percent from the same month in 2012 and the biggest gain since November 2005. Lawrence Yun, NAR’s chief economist, estimated home price increases will boost household wealth by as much as $1.7 trillion in 2013.

Other indicators also show home values are on the rise. Real estate prices advanced 6.5 percent in the year through January, the Federal Housing Finance Agency said on March 21.

Prices, Rates

Increased demand may further propel prices higher, encouraging others to join the market to take advantage of cheap mortgage rates. The average rate on a 30-year fixed loan dropped to 3.54 percent last week, compared with 4.08 percent a year ago, according Freddie Mac. The 30-year rate reached a record- low 3.31 percent in November.

“We feel really good this spring,” Doug Yearley, chief executive officer of homebuilder Toll Brothers Inc., said during a March 20 interview on Bloomberg Radio. “Demand is back. We’ve had so many people on the sidelines for five years. They’re all coming back out, taking advantage of these great interest rates. It’s the early stages of recovery but it feels pretty solid.”

“One of the most powerful tools we have is bringing down mortgage rates and stimulating home buying, construction, and related industries,” Federal Reserve Chairman Ben S. Bernanke said during a March 21 press conference. Financial institutions may have “gone too far” in setting requirements to obtain financing amid concerns about new regulations, he said. Banks “may have tightened the mortgage credit box more than would be desirable in a long-run, healthy economy.”