Prices in the 20-city index also rose on a month-over-month basis, rising 0.2 percent in December, more than reversing November's modest loss.
The increase in prices has been driven by record-low inventory — supply of homes on the market in December was the lowest recorded in 13 years.
Atlanta and Detroit posted their biggest year-over-year increases of 9.9 percent and 13.6 percent since the start of their indices in January 1991.
Dallas, Denver and Minneapolis recorded their largest annual increases since 2001.
Phoenix continued its improving trajectory, posting a year-over-year return of 23 percent along with eight consecutive months of double-digit annual growth.
Meanwhile, the Commerce Department reported on Tuesday that new-home sales rose 15.6 percent in January to a seasonally adjusted annual rate of 437,000, the fastest pace since June 2008. December's figure is 28.9 percent above the January 2012 level.
Despite the uptick, sales are still running behind the 700,000 annual level that is considered healthy.
In addition, December's sales were revised higher to 378,000 from 369,000.
The median sales price of new houses sold in January was $226,400. There were 150,000 new homes for sale at the end of last month, only slightly above the rock-bottom level of 143,000.
At the current sales pace, housing inventory would sell out in 4.1 months, the smallest supply in eight years.
"Today's report shows a strong revival in new-home sales across all regions of the country and bodes well for the upcoming spring buying season," said David Crowe, chief economist for the National Association of Home Builders (NAHB).
"That said, the razor-thin supply of new homes for sale is very concerning at a time when we are only about halfway back to what could be considered a 'normal' level of activity. Builders need to be able to refresh their inventories to keep the momentum going."
Sales posted solid gains across every region in January — a 27.6 percent increase in the Northeast, an 11.1 percent gain in the Midwest, a 3.2 percent gain in the South and a 45.3 percent gain in the West.
"While we can't expect to see double-digit sales growth every month, consumers are definitely coming off the fence as prices start to rise, and builders in some cases are having a tough time keeping up," said Rick Judson, chairman of the NAHB and a home builder from Charlotte, N.C.
"Challenges related to credit availability, poor appraisals, dwindling lot supplies, spot shortages of skilled labor and rising materials costs are all weighing on the recovery process."
In a separate report, home prices were up 1.4 percent in the fourth quarter and 0.6 percent in December, the Federal Housing Finance Agency’s (FHFA) reported on Tuesday.
Seasonally adjusted home prices rose 5.5 percent from the fourth quarter of 2011 to the same quarter last year.
"The fourth quarter was another strong one for house prices, as it was the third consecutive quarter where U.S. price growth exceeded 1 percent,” said Andrew Leventis, FHFA's principal economist.
"While a significant number of homes remained in the foreclosure pipeline, the actual number of homes available for sale was very low and fell over the course of the quarter."
This story was updated at 12:15 p.m.