Median single-family home prices rose in 120 out of 149 metro areas, up dramatically from the 39 metros that recorded price increases a year earlier, the National Association of Realtors said.

The national median price for single-family homes hit $186,000, a 7.6% increase from $173,000 a year earlier. This is the strongest year-over-year increase since the first quarter of 2006, when the median price rose 9.4%.

Existing home sales in the Midwest, Northeast and South increased, while home sales in the West declined 1.2% due to lack of building supplies.

The increase in pricing is a clear indication of a market recovery. Potential homebuyers were also able to meet stringent mortgage credit standards this quarter because of their income levels.

The growth in home prices is directly linked to supply and demand, according to NAR chief economist Lawrence Yun.

"Earlier this year, a broad equilibrium began to develop in most areas between home buyers and sellers, which led to a sustained upturn in home prices," he said.

 He added, "We expect fairly normal appreciation patterns in 2013, but there is a risk of price acceleration if builders are unable to increase supply to meet the needs of our growing population and household formation."

Distressed homes – foreclosures and short sales – accounted for 23% of Q2 sales, which declined 30% from a year earlier.

The 30-year conventional fixed-rate mortgage hit a record low of 3.54%, compared to 3.80% last quarter and 4.31% last year, according to Freddie Mac

Existing home sales – including single family houses and condos – increased 3.2% to a seasonally adjusted annual rate of 4.68 million in Q3 from 4.54 million in Q2.

By the end of the most recent quarter, 2.32 million existing homes were available for sale. This is 20% below the close of homes a year prior.

Moe Veissi, president of NAR and broker-owner of Veissi & Associates Inc., said in a statement that affordability is a big factor in rising sales.

"Sales this year are notably higher than the levels seen in 2008 through 2011, so we're clearly in a recovery phase with rising sales, declining inventory and rising prices," she said. "Of course the recovery would be stronger and more stable if we could return to safe but sensible mortgage underwriting standards."

First-time buyers declined to 32%, compared to 34% last quarter. The share of all-cash home purchases also declined to 27%, compared to 29% last quarter.

"The modest decline in first-time buyers and investors shows the impact of limited inventory in the lower price ranges from a shrinking share of distressed homes, which are popular with both of these groups," Yun said.