Sept. 25 (Bloomberg) -- Home prices in 20 U.S. metropolitan areas fell the most on record in July, indicating the threat to consumer spending was rising even before credit markets seized up in August, a private survey showed today.

Values dropped 3.9 percent in the 12 months through July, steeper than the 3.4 percent decrease in June, according to the S&P/Case-Shiller home-price index. The index declined in January for the first time since the group started the measure in 2001, and has receded every month since then.

Stricter lending standards and reduced demand are prolonging the housing slump, now entering its third year. Prices may continue to fall as homes stay on the market longer, economists said. Diminished housing wealth may spur households to pare spending, hurting economic growth.

The housing slump ``doesn't seem like it will go away any time soon,'' said Michael Gregory, a senior economist at BMO Capital Markets in Toronto, who forecast the index to drop 4.1 percent. ``As far as consumers go, this is another sort of pall over'' their ability to borrow against the value of their homes, he said.

Economists forecast the gauge would slide 4 percent, according to the median estimate in a Bloomberg News survey.

After the report, 10-year Treasury notes stayed higher, with the yield falling to 4.59 percent at 10:13 a.m. in New York, from 4.63 percent late yesterday.

The group's 10-city composite index, which has a longer history, dropped 4.5 percent in the 12 months ended in July.

Summer Declines

Compared with June, home prices in the 20 areas fell 0.4 percent after a 0.4 percent decline the month before. The figures aren't seasonally adjusted, so economists prefer to focus on the year-over-year change.

``The housing market has been weakening now for a couple of years and it just continues on its trajectory,'' said Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, in an interview.

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 a 9.7 percent decrease in Detroit. The area showing the biggest gain was Seattle, where prices rose 6.9 percent.

Prices for single-family homes in the New York metropolitan area were down 3.8 percent compared with a year earlier.

Other Reports

Separately, the Conference Board said today that its index of consumer confidence fell more than forecast in September to the lowest level in almost two years, as declining home values and tougher borrowing standards took a toll on Americans' spirits.

The National Association of Realtors, in a report today, said sales of previously owned U.S. homes fell in August to a five-year low. Purchases were down 4.3 percent, less than forecast, to an annual rate of 5.5 million, the Realtors group said in Washington. Sales dropped 13 percent from a year earlier and median home prices rose 0.2 percent to $224,500.

Existing homes account for about 85 percent of the market and sales of new homes make up the rest. The report on new-home purchases, which are calculated based on signings and are considered a more timely indicator, is due from the Commerce Department tomorrow.

Rate Cut

The measures from Commerce and the Realtors group can be influenced by changes in the types of homes sold. Because the S&P/Case-Shiller index and another gauge by the Office of Federal Housing Enterprise Oversight track the same home over time, economists say these more accurately reflect price trends.

Most economists expect housing to extend its two-year slump and continue to be a drag on economic growth as loan foreclosures rise and tougher lending standards make borrowing more difficult.

The Federal Reserve, cut its benchmark interest rate on Sept. 18 for the first time in four years and said the credit meltdown ``has the potential to intensify the housing correction, and to restrain economic growth more generally.'' Weakness in the housing market was part of the reason U.S. payrolls fell by 4,000 last month.

The number of Americans who may lose their homes to foreclosure more than doubled in August from a year earlier, according to a report Sept. 18 by RealtyTrac Inc.

`Heavy' Discounts

Fed Chairman Ben S. Bernanke, on Sept. 20, repeated the central bank's intention to issue new consumer-protection rules by year-end. He also told the House Financial Services Committee that the subprime turmoil has spread through financial markets, ``raising concern about the consequences for economic activity.''

Bernanke made his comments at a Congressional hearing that also included testimony from Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson.

A glut of homes on the market adds to pressure for sellers to lower prices. The inventory of single-family existing homes on the market represented a 9.2-months' supply in July, the most since October 1991, the Realtors group said on Aug. 27.

Earlier today, Lennar Corp., the largest U.S. homebuilder, reported the biggest quarterly loss in its 53-year history. Revenue at Miami-based Lennar fell 44 percent to $2.34 billion, the lowest in more than three years.

``Heavy discounting by builders, and now the existing home market as well, has continued to drive pricing downward,'' Lennar Chief Executive Officer Stuart Miller said in a statement.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: September 25, 2007 15:25 EDT