Zillow, the housing website for some reason seen as a credible analyst of housing prices, reports today that US home values have increased by the most since 2006, the year before the housing collapse. This sounds like a breakthrough until you recognize that the price gain in the third quarter being lauded here is a skinny 1.3%. Plus, in over half the markets studied, 52%, home values fell. It’s hard to write a national story about a very intensely local series of housing markets. But Bloomberg does understand the nature of the “recovery” in housing.

Home prices are rising nationally as the U.S. unemployment rate declines and buyers compete for a tightening supply of homes listed for sale. Still, values fell from the second quarter in 52 percent of markets covered by the index as the traditional homebuying season ended, according to Zillow Chief Economist Stan Humphries.

“The housing market is on the mend, but the housing bottom will be a protracted one,” he said in a telephone interview. “We will see more muted appreciation in the near term before we get back to normal appreciation trends.”

In Phoenix, where investor demand is helping to boost prices, home values rose the most of the 30 largest U.S. metropolitan areas, with a 5.9 percent increase from the second quarter, according to Zillow. They climbed 3.9 percent in Las Vegas and 3.8 percent in Denver, Zillow said.

Those are the two major elements to the snap back in prices: constricted supply, and investor purchases boosting demand. That’s really the whole story.

And yet, despite all the alleged good news, housing market remain worse in 65% of the country relative to 2008. Delinquencies started trending back up in September, and remain elevated. This expectation of a virtuous circle in housing as prices appreciate doesn’t exist in a good part of the country, and can easily be reversed by rising defaults.

Not to mention the fact that there are still ongoing abuses from a broken servicing sector, and no real plan to actually address them over the long term in anywhere but a few pockets of the country (and the banks and federal regulators are literally punishing these states for consumer protection laws that defend homeowners).

I’m sure to be described as a “perma-bear” for this post, but the truth of the matter is that we shouldn’t just look at home prices as if on a scoreboard to judge the relative health of the housing market.