By Laura Kusisto 

Home prices in January rose at their fastest rate since mid-2014, a trend that bodes well for sellers but could ultimately start to dampen buyer demand this spring selling season.

The S&P CoreLogic Case-Shiller Indices, which cover the entire nation, rose 5.9% in the 12 months ended in January, the strongest increase in 31 months, up from a 5.7% year-over-year increase reported in December.

The 10-city index gained 5.1% over the year, up from 4.8% the prior month, and the 20-city index gained 5.7% year-over-year, up from a 5.5% increase in December.

Economists surveyed by The Wall Street Journal expected the 20-city index to climb by 5.6%.

The strong growth in prices poses a challenge for first-time buyers trying to get into the market this year.

"This spring market looks to be heated. There are a far larger number of buyers chasing after fewer inventories," said Lawrence Yun, chief economist at the National Association of Realtors. "Prices are easily outpacing people's income growth" which is causing "consternation for renters who are trying to get into the homeownership market."

The hottest markets in the country remain concentrated in the northwest. Seattle led the way with a 11.3% increase, Portland reported a 9.7% year-over-year gain and Denver had a 9.2% annual increase in home prices.

Home prices hit a new record in September and have continued climbing by more than 5% year-over-year since then, driven by strong demand and a shortage of homes for sale. Inventory in December hit its lowest level since 1999, when the National Association of Realtors started tracking the data.

The number of homes for sale was down 7.1% in January compared with a year earlier, the realtors said. It has since ticked up slightly but inventory in February remained 6.4% below a year earlier.

Tight supplies and rising prices may be deterring some people from trading up to a larger house and also shrinking the number of households that can afford to buy at current price levels, said David Blitzer, managing director at S&P Dow Jones Indices. "At some point, this process will force prices to level off and decline -- however we don't appear to be there yet."

Month-over-month, the U.S. Index rose 0.2% in January before seasonal adjustment, while the 10-city rose 0.3% and the 20-city index increased 0.2% from December to January.

After seasonal adjustment, the national index rose 0.6% month-over-month, while both the 10-city and 20-city index rose 0.9%.

Purchases of previously owned homes declined in both January and February, as tight inventory and rising prices frustrated would-be buyers. Existing homes sells declined 3.7% in February, the National Association of Realtors said.

Write to Laura Kusisto at laura.kusisto@wsj.com

(END) Dow Jones Newswires

March 28, 2017 09:29 ET (13:29 GMT)