July 31 (Bloomberg) -- Home prices in 20 U.S. cities fell the most in at least six years, suggesting the housing recession has yet to touch bottom.

The S&P/Case-Shiller index of home prices in 20 metropolitan areas dropped 2.8 percent in May from a year ago, led by declines in Detroit and San Diego, according to the report issued today by Standard & Poor's and MacroMarkets LLC. The drop was less than the median forecast of four economists surveyed by Bloomberg News.

The declines indicate that housing will continue to hamstring the world's largest economy, economists say. A glut of unsold properties and mounting defaults are forcing builders to scale back construction and hindering consumer spending as homeowners are less able to borrow against home equity.

``Things are getting worse rather than better,'' said Sal Guatieri, senior economist at BMO Capital Markets in Toronto. ``If home prices keep falling, eventually consumer confidence and spending will take a hit.''

Still, a separate industry report today showed consumer sentiment gained more than forecast in July, to the highest in almost six years. The New York-based Conference Board's index of consumer confidence rose to 112.6 in July from a revised 105.3 the prior month.

Treasuries were little changed after the reports, with the yield on the benchmark 10-year note at 4.80 percent at 11:32 a.m. in New York, from 4.80 percent late yesterday.

Biggest Since 1991

S&P/Case-Shiller's 10-city composite index, which has a longer history, declined 3.4 percent in May from a year earlier, the biggest drop since 1991.

Declining residential construction has detracted from overall economic expansion for the last seven quarters, trimming growth by 0.5 percentage point in the second quarter. Falling home prices are affecting consumers, helping to slow spending growth to a 1.3 percent pace in the April-to-June period after the prior quarter's 3.7 percent rate.

Sales of new and previously owned homes fell to a 6.58 million annual pace in June, down 23 percent from their peak in 2005, according to reports last week. Inventories of unsold homes in June were at 4.7 million, close to a record. Housing starts in June were down 36 percent from their January 2006 peak pace of 2.29 million units.

Fifteen cities showed a year-over-year decrease in prices for the month, led by an 11.1 percent drop in Detroit and a 7 percent decline in San Diego, according to today's report on prices in 20 cities.

Seattle Gains

The biggest increases in home values were in Seattle, where prices rose 9.1 percent, and Charlotte, with a 7 percent gain.

The S&P/Case-Shiller index and another gauge by the Office of Federal Housing Enterprise Oversight track individual homes through repeat sales and more accurately reflect price trends than the median prices reported by the government and the National Association of Realtors, economists say.

The Commerce and Realtors' price measures can be influenced by changes in the types of homes sold. Higher sales of cheaper homes relative to more-expensive properties will yield figures biased toward the low side.

Median new-home prices fell 2.2 percent in June from a year earlier, while median existing home prices rose 0.3 percent, according to last week's reports from Commerce Department and the National Association of Realtors.

A recovery in housing is being held back in part by a wave of subprime mortgage defaults, which is throwing homes back onto the market and prompting banks to tighten standards for borrowers with poor or limited credit histories. Mortgage lenders are feeling the pinch.

``We are experiencing home-price depreciation almost like never before, with the exception of the Great Depression,'' Angelo Mozilo, chief executive officer of Countrywide Financial Corp., said last week on a conference call after the biggest U.S. mortgage lender reported a 33 percent decline in second-quarter net income due to late loan payments.

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

Last Updated: July 31, 2007 11:34 EDT