Nov. 27 (Bloomberg) -- Home prices in the U.S. fell in the third quarter by the most in at least two decades as the subprime lending crisis caused sales to slump.

Home values retreated 4.5 percent in the three months through September from the same period a year before, the most since records began in 1988, according to a report today by S&P/Case-Shiller. It followed a 3.3 percent drop in the second quarter.

Prices will probably keep sliding as foreclosures force more properties on to the market and sales weaken as mortgages become harder to get. The slump threatens to slow consumer spending as fewer homeowners will be able to afford vacations, new autos or home improvement projects.

``We see this as just the beginning of a downward trend,'' said Michelle Meyer, economist at Lehman Brothers Holdings Inc. in New York, who correctly forecast the quarterly decline. ``Weaker home prices imply a weaker consumer.''

Home prices in 20 U.S. metropolitan areas dropped 4.9 percent in the 12 months ended September, the most since S&P/Case-Shiller began compiling the index in 2001. The decline followed a 4.3 percent drop in August.

Economists forecast the 20-city gauge would decrease 4.8 percent in the quarter, according to the median of 13 estimates in a Bloomberg News survey.

Market Reaction

Treasury securities remained lower after the report as Abu Dhabi's investment in Citigroup Inc. eased demand for the relative safety of government debt. Stocks rose.

Compared with August, home prices in the 20-city index fell 0.9 percent after a 0.7 percent decline the month before. The figures aren't seasonally adjusted, so economists prefer to focus on the year-over-year change.

``We are in a period of exceptional uncertainty about the value of our homes,'' said Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, on a conference call. ``There is a significant chance of recession.''

Shiller and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

The index is a composite of transactions in 20 metropolitan regions. Fifteen cities showed a year-over-year decline in prices, led by an 11 percent drop in Tampa and a 10 percent decline in Miami. Seattle and Charlotte were tied for the biggest gain at 4.7 percent.

The group's 10-city composite index, which has a longer history, dropped 5.5 percent in the 12 months ended in September.

Declining Values

The housing recession will drive down property values by $1.2 trillion next year and slash tax revenue by more than $6.6 billion, according to a report issued today by the U.S. Conference of Mayors. The 361 largest U.S. cities will experience a combined loss of $166 billion in economic growth, led by $10.4 billion in the New York-Northern New Jersey area, according to the study.

Most economists forecast the housing slump will persist and continue to be a drag on economic growth as tougher lending standards squeeze demand.

``The potential for significant further weakening in housing activity and home prices represented a downside risk to the economic outlook,'' the Federal Reserve said last week in the release of minutes of its Oct. 31 policy meeting. ``Participants expressed a concern that larger-than-expected declines in house prices could further sap consumer confidence as well as net worth, causing a pullback in consumer spending.''

Less Spending

Economists surveyed by Bloomberg News forecast consumer spending will grow at a 2 percent rate in the current quarter, down from 3 percent from July through September. The economy will slow to a 1.5 percent rate, from the prior quarter's 3.9 percent pace, according to the survey median earlier this month.

Sales of previously owned homes fell in September to the lowest level since record-keeping began in 1999, while new-home sales rose from an 11-year low, according to reports last month.

D.R. Horton Inc., the second-largest U.S. homebuilder, reported this month that it had a loss in its fiscal fourth- quarter and its worst annual results in at least a decade.

Chief Executive Officer Donald Tomnitz said on a conference call that 2008 will be ``more difficult'' than 2007 and that lower sales prices were having little success in boosting demand.

Shiller, noting that home prices fell ``more than 40 percent'' in Los Angeles between 1989 and 1997, said declines of 50 percent in some markets were ``not out of the question.''

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: November 27, 2007 12:05 EST