Oct. 27 (Bloomberg) -- A gauge of home prices in 20 U.S. cities rose in August for a third consecutive month, bolstering the case that an economic recovery is at hand.

The S&P/Case-Shiller home-price index climbed 1 percent from the prior month, seasonally adjusted, after a 1.2 percent increase in July, the group said today in New York. From a year earlier, the gauge fell 11.3 percent, less than forecast.

Rising home sales, due in part to government programs including the first-time buyer credit and efforts to lower borrowing costs, have helped stem the slump in property values that precipitated the worst recession since the 1930s. Sustained gains in household spending, the biggest part of the economy, may be harder to come by as joblessness mounts.

“We’re nearing the bottom in home prices,” said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. “Right now the government is helping to stabilize housing.”

Most stocks in the U.S. fell for a third day as an unexpected drop in consumer confidence spurred concern about the strength of the recovery. The Standard & Poor’s 500 Index closed down 0.3 percent at 1,063.41.

The home-price index was forecast to fall 11.9 percent from August 2008, after a 13.3 percent drop in the 12 months ended in July, according to the median forecast of 33 economists surveyed by Bloomberg News. Estimates ranged from declines of 11 percent to 13.3 percent. Year-over-year records began in 2001.

Price Rebound

The gains over the last three months have been the strongest since the three months ended in December 2005.

Nineteen of the 20 cities in the S&P/Case-Shiller index showed a smaller decline year-over-year than in July. Dallas showed the smallest drop since August 2008, at 1.2 percent, while Las Vegas showed a 30 percent decrease, the most of any city.

Compared with the prior month, 15 of the 20 areas covered showed an increase while four showed a decline. The biggest month-over-month gain was in San Francisco, which showed a 2.6 percent gain. Dallas, with a 0.04 percent increase, was virtually unchanged.

“The good news about this is it really looks like a bottom,” Karl Case, an economics professor at Wellesley College and co-creator of the index, said today in an interview on Bloomberg Radio. “The two risks are employment is terrible and the pipeline is still full of foreclosures. That has to be cleared out eventually for this to really turn up and produce a recovery.”

Housing Stabilizes

In the latest evidence of rising demand, existing home sales in September jumped to a 5.57 million annual rate, more than economists forecast and the highest in more than two years, according to data from the National Association of Realtors issued last week.

Housing and manufacturing are leading the stabilization in the economy, the Federal Reserve said in the Beige Book survey of conditions in its 12 district banks during September and early October.

“Most districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses,” the Fed said.

Foreclosure Risk

One risk to the emerging stabilization is foreclosures, which worsen the property glut. Foreclosure rates will climb through late 2010, peaking only after the unemployment rate reaches 10.2 percent in the second quarter, Jay Brinkmann, chief economist at the Mortgage Bankers Association, said this month.

Unemployment, which is projected to exceed 10 percent by early 2010, according to the median estimate in a Bloomberg survey earlier this month, will also limit demand. Economists and industry groups are among those projecting home sales will also cool in the absence of the $8,000 credit for first-time buyers, due to expire Nov. 30. Lawmakers are debating extending the credit.

The Standard & Poor’s Supercomposite Homebuilding Index has climbed 22 percent since the beginning of July on the improving outlook for housing, compared with a 16 percent increase in the S&P 500 index. The builder index fell yesterday on concern that the tax-credit program may not be extended.

“The residential housing market appears to have stabilized, but it has done so at a very low level,” William Foote, chief executive officer of USG Corp., North America’s largest maker of gypsum wallboard, said Oct. 21 on a conference call. The Chicago-based company posted its eighth straight net loss last quarter as sales dropped 32 percent from a year ago.

Case and Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, created the home-price index based on research from the 1980s.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: October 27, 2009 16:27 EDT