WASHINGTON (MarketWatch) — Prices for U.S. homes rose in March, marking the fastest annual growth rate in nearly seven years, according to data released Tuesday.

The S&P/Case-Shiller 20-city composite rose 1.4% in March, the largest monthly growth since July. On a seasonally adjusted basis, prices rose 1.1% in March.

The growth from the same period of last year was 10.9%, which marks the highest year-on-year growth rate since April 2006. All 20 cities tracked by the gauge saw year-over-year improvements for a third consecutive month.

“Other housing market data reported in recent weeks confirm these strong trends: housing starts and permits, sales of new home and existing homes continue to trend higher,” said David Blitzer, chairman of the index committee at S&P Dow Jones Indices.

U.S. stock markets were up sharply.

Low inventory and interest rates, as well as pent-up demand, are supporting home prices. There are also fewer distressed sales. A government gauge of consumer costs for shelter indicates that prices have increased about 2.2% over the past year. Despite recent gains, prices remain about 28% below a 2006 peak.

A 'For Sale' sign is posted in front of a house in Hollywood, Fla. Getty Images

Rising home prices encourage market activity as more owners are willing and able to place their homes on the market.

“Overall, the ongoing rise in home prices should remain supportive for the broader housing market recovery, helping to sustain the improvement in homebuyer confidence and to bring a considerable number of underwater homeowners back above water,” said Gennadiy Goldberg, U.S. strategist at TD Securities.

However, rapidly rising prices and bidding wars in certain markets are preventing first-time buyers from participating. With fewer first-time buyers, it’s tougher for other owners to sell and move up from starter homes.

Phoenix posted the largest year-over-year price growth at 22.5%, while New York had the lowest at 2.6%.

“The big gains continue to come from the cities which were most affected by the bursting of the housing bubble,” said Steven Ricchiuto, chief economist at Mizuho Securities USA.

While there is some concern about the formation of new bubbles, credit is much tougher to obtain now. In fact, some economists are concerned that the pendulum has swung too far, barring credit-worthy applicants from obtaining mortgages.