Significant price increases in bank-owned foreclosures are driving gains at the national, regional and local levels, helping home prices turn the corner with small quarterly and yearly gains.

National average prices for bank-owned foreclosures (REO) were up 8.1 percent over a year ago on a median price-per-square-foot basis, according to May data from Clear Capital, and have outpaced non-REO price declines of -0.7 percent by 8.8 percentage points.

“Strength in REO-only price trends as well as some early indications of price gains spreading from low tier sectors to the mid, and higher-priced homes is helping confirm that the country continues to make progress on its recovery, and we are expecting to see improvements extend over the next several months,” said Dr. Alex Villacorta, Director of Research and Analytics at Clear Capital.

Clear Capital reported today that in May national median home prices grew on both a quarterly and yearly basis for the first time since August 2010. Regional performance improved across the board with the West, South and Northeast also seeing quarterly and yearly gains. However, the Midwest sustained declines, but milder since last.

“National real estate prices in May have finally moved past the continued losses of the last few years. The subsequent stabilization pattern seen in recent months has progressed into the start of moderate growth,” said Villacorta.

Short-term quarterly price trends picked up slightly at the national level, with appreciation of 0.4 percent turning into the first quarterly gain since November of 2011. The positive move at the broader market level is a reflection of the increasing strength at the regional level.

Helping to support growth at the national level, the West saw a notable jump in prices over the quarter, taking the lead over all the regions with growth of 2.7. The South recorded home price appreciation of 1.2 percent quarter-over-quarter, doubling the small gains of 0.6 percent reported on last month. Similarly, the Northeast matched the national level gains of 0.4 percent over the quarter, showing a modest uptick over the gains of 0.2 percent reported last month.

The Midwest continued to absorb price declines. With prices declining only -2.0 percent over the quarter the magnitude of the declines are subsiding, as compared to last month’s quarterly losses of -2.7 percent.

While growth in REO-only prices is driving broader market gains for most of the regions, the impact on overall prices depends on the level of REO market saturation. For example, the Northeast has seen incredible growth in the REO-only sector shown above, yet has only recorded 1.6 percent gains year-over-year in overall prices. Because the Northeast has a mere 10 percent REO saturation, the lowest level across all regions, even substantial growth in the REO-only price segment hasn’t swayed overall prices significantly. Additionally, the Northeast’s REO-only prices are more sensitive to shifting demand, fueling the seemly high annual gains, said Villacorta.

The Midwest is the only region that continues to see REO-only price declines on a year over year basis. While REO-only price growth has led the other regions into broader based growth, the Midwest has yet to receive assistance from this sector on overall progress. It’s worth noting that the Midwest’s REO saturation levels are still the highest of all the regions. As such, price weakness in the REO-only segment has been harder for the market to shake off, resulting in sustained declines at the broader level, as seen in overall yearly declines of -3.1 percent.

However, each of the three regions now seeing gains in REO-only prices first saw long term reductions in REO saturation rates. And while the Midwest continues to face declines, it has achieved a reduction in its REO saturation rate over the last several years, from a high of 45 percent in 2009, down to 37 percent in May.

The stage is set for the nation’s housing economy to recover, but the recovery has not yet begun. That’s the consensus of a Webinar today from three of Standard & Poor’s economists after presenting the latest data.

Robert Keiser, Vice President of Global Markets Intelligence at S&P Capital IQ, said it is too soon to say the housing markets are in recovery. ‘Homeowners’ credit situation has improved greatly since the bust and there is no supply hangover-inventories have dropped to 2.2 million from 3.3 million in July 2006. Supply is normalized. New homes are at their weakest since 1981, he said.

“The key question for the housing recovery is consumer confidence and the key to consumer confidence is job creation. We need two or three months of payroll growth. There is lots of talk about recovery but when we here that buyers are losing out on homes, they will start to drive prices up,” said Kaiser.

Prices will define whether or not we are in a recovery and it is one of the last indices to recover. So far, prices are at the same level as ten years ago, David Blitzer, Managing Director and Chairman of the S&P Index Committee at S&P Indices. He noted that on the buy-or-rent ratio, prices slipped back into buy territory recently, but not by much. Foreclosures have declined substantially, Blitzer said, but the price declines they bring about scare off buyers who decide to wait for lower prices.

“We are recovering, but as far as being in a recovery goes, we’re not there yet,” he said.