Michelle Jamrisko
Bloomberg News

Home prices rose in the year ended in September by the most since July 2010, showing the recovery in the U.S. real estate market is a source of strength for the economy.

The Standard & Poor’s/Case-Shiller index of property values in 20 cities climbed 3 percent from September 2011, after advancing 2 percent in the year to August, the group said Tuesday. The median forecast of 29 economists in a Bloomberg survey projected a 3 percent gain. Home prices from July through September climbed the most since the second quarter of 2010.

Cleveland-area home prices rose 1.4 percent from a year ago, according to the index. The Cleveland region was one of five metro areas where unadjusted prices dropped modestly in September compared with August; prices were down 0.9 percent. When adjusted to take into account seasonal changes, Cleveland metro prices rose 0.6 percent in September from August, according to the Case-Shiller index.

An improving labor market and record low mortgage rates are shoring up demand for properties, helping explain an increase in optimism among builders. At the same time, Federal Reserve policymakers are pressing forward with monetary accommodation that underpins the residential real-estate recovery and the economic expansion.

“I think it’s a stabilization on the sales side that’s probably helping with the prices here,” said Sean Incremona, senior economist at 4Cast Inc. in New York. “We’ve had several years now for the housing recovery to sort of catch its feet, and it looks like we are starting to crawl out of the giant hole that we dug into from the financial crisis.”

Estimates in the Bloomberg survey ranged from gains of 2.2 percent to 3.6 percent. The Case-Shiller index is based on a three-month average, which means the September data were influenced by transactions in July and August.

Home prices adjusted for seasonal variations increased 0.4 percent in September from the prior month, with 18 of 20 cities showing gains. Atlanta and San Diego showed advances of 1.7 percent. Property values dropped 0.7 percent in Chicago and were unchanged in Tampa, Fla. Unadjusted prices climbed 0.3 percent in September from the prior month.

Eighteen of the 20 cities in the index showed a year-over-year gain, led by a 20.4 percent surge in Phoenix. New York and Chicago posted the two decreases in values from a year earlier. Year-over-year records began in 2001.

“With six months of consistently rising home prices, it is safe to say that we are now in the midst of a recovery in the housing market,” David Blitzer, chairman of the index committee, said in a statement.