Aug. 14 (Bloomberg) -- The good news in the worst housing slump since the Great Depression is that the market in Cleveland is recovering. That's also the bad news.

The Cleveland area led the nation for home price gains in April and May with an 18 percent jump in the lowest price tier of the S&P/Case-Shiller home price index after values fell to levels last seen in 2000. The median home price was $117,500 in the second quarter, 15 percent higher than the prior three months, the National Association of Realtors said in a report today.

A housing revival in this city of 438,000 on the shore of Lake Erie may portend deeper drops in U.S. markets. Prices for entry level homes in Cleveland had to tumble 37 percent from a September 2005 peak to an almost 11-year low in March before enticing first- time buyers. That may be a sign that U.S. markets with the biggest price increases during the 2000 to 2005 boom have much further to fall before stabilizing, said David Blitzer, chairman of Standard & Poor's Index Committee.

``The areas of the country that saw prices go through the roof and then fall into the basement won't be the first ones to see an upturn,'' Blitzer said in an interview. ``It's more likely to come in a place like Cleveland or other Midwestern cities that largely missed the boom.''

Cleveland never experienced the big home-price gains of its coastal counterparts such as New York or San Francisco. Gains were more modest as Cleveland, like other cities in the Midwest, saw jobs in steel, automotive and manufacturing shipped overseas.

Foreclosure Crisis

Prices in the Cleveland area rose an average of 3 percent a year from 2000 to 2005, according to S&P/Case-Shiller data. Prices in the metropolitan New York and Los Angeles areas gained 15 percent and 23 percent, respectively, in that period.

Now that Cleveland is starting to recover, it may be leading other areas of the country on their way to finding a housing bottom, said Robin Dubin, an economics professor at the Weatherhead School of Management at Case Western Reserve University in Cleveland.

``Cleveland was hit first with the foreclosure crisis,'' Dubin said. ``Other communities are just behind Cleveland and they will start to come out of it pretty soon.''

The May S&P/Case-Shiller index put Cleveland's highest priced homes, properties that sold for more than $182,000, back to 2003 prices, and the overall market back to 2002 levels. Minneapolis gained 0.6 percent in May from the prior month, its biggest gain in two years. The latest reading puts home prices in Minnesota's largest city back to 2003.

Price Rollback

``If you look at Cleveland or Minneapolis, they're almost back to where they started,'' said Justin Walters, co-founder of Bespoke Investment Group, a Harrison, New York-based firm that manages money for wealthy investors and provides financial research to institutions. ``Most other parts of the country have a ways to go before they can say that.''

For Los Angeles home prices to reach their 2003 levels it would require another 14 percent decline, on top of the 28 percent tumble since peaking in September 2006, according to S&P data.

Las Vegas prices would have to decline 13 percent to reach 2003 levels, on top of its 31 percent drop since peaking in August 2006. Miami would have to see home prices drop 16 percent to erase the gains of the last five years, in addition to the 31 percent decline since December 2006, the S&P data shows.

``It's going to be like a long slow car crash to work through the housing situation, and we're still in the middle of it,'' said Joseph Veranth, chief investment officer at Dana Investment Advisors, which manages $2.8 billion. ``We think it will go well into 2009.''

Foreclosure Sale

In the Cleveland area, the price declines are bringing buyers back into the real estate market.

Justin Taress, 33, and Ericka Conyer, 30, bought a four- bedroom house this month for $93,000 in Shaker Heights, east of the city. The home was foreclosed on five months ago after the previous owner defaulted on a subprime mortgage, according to real estate records.

Taress said they plan to raise their three children in the beige-colored Colonial-style home after spending about $10,000 on repairs to it.

Buyers like these are helping increase home values beyond Cleveland. Indiana had the fastest U.S. pace of price appreciation in the first quarter, at 1.31 percent, followed by Colorado, at 1 percent, according to the latest government figures available.

Ohio had the third-fastest pace of price appreciation in the U.S. in the first quarter with a 0.97 percent gain, the Office of Federal Housing Enterprise Oversight said.

Small Cities Rebound

The small-city revival is continuing in the current quarter, according to the S&P/Case Shiller study. The index measured a 1 percent month-to-month gain in Denver home prices in May, on the heels of a 0.8 percent increase in April. The index of 20 U.S. cities doesn't include Indiana communities.

The government data shows Nevada tumbled 5 percent in the first quarter, California fell 4.4 percent, and Florida dropped 3.3 percent.

Now that prices have fallen so much in Cleveland, brokers are once again finding the market is busy.

``The banks are motivated to unload now,'' said Linas Muliolis, a broker with Century 21 Homestar, who handled the Taress and Conyer home purchase. ``They have to sell now.''

Cleveland's real estate revival may be tenuous. Foreclosures stemming from job losses and mortgage defaults by people with poor or limited credit histories remain high in a city once derided as ``The Mistake on the Lake.''

Job Losses

The city's job losses, its financial troubles in the 1970s, and the oil-slicked Cuyahoga River catching fire in 1969 eroded its reputation around the country. The unemployment rate in the Cleveland area is 10.1 percent, compared with 5.7 percent for the U.S. The city is home to the second-largest private employer in the state, Cleveland Clinic Health System, according to a March report from the Ohio Department of Development. Wal-Mart Stores Inc., the world's largest retailer, is the largest private employer in the state, according to the report.

The Cleveland area had 2,894 properties in some stage of foreclosure in July, or 1 in every 325 households, according to Irvine, California-based RealtyTrac Inc.

``We have more auction sales than Realtor sales,'' said Jim Rokakis, the treasurer for Cuyahoga County, where Cleveland is located.

Still, the number of houses in the foreclosure process was down 35 percent from a year earlier, one of only four cities to register a drop among the top 50 metropolitan areas in the U.S., according to RealtyTrac data. Cleveland ranked No. 47 on the list in July, after being at No. 6 for all of 2007.

Pulling in Buyers

``Ultimately what has to happen is you have to have prices reach a level that will pull buyers in,'' said Michelle Girard, senior economist at RBS Greenwich Capital Markets in Greenwich, Connecticut.

Cleveland was founded on the east bank of the Cuyahoga River by Moses Cleaveland, who led the first survey of the area that was finished in 1796, according to ``Ohio History Central,'' a Web site operated by the Ohio Historical Society. An error on the area's first map led to the city being spelled Cleveland, according to the Web site.

Cleveland was close to natural resources such as oil, iron ore and coal, which gave rise to its industrial prominence in the first half of the 20th Century, according to Richard DeKaser, chief economist at National City Corp. in Cleveland.

The area lost jobs as those resources became depleted and manufacturers found it cheaper to make goods elsewhere, DeKaser said. Increased productivity also cut jobs as companies needed fewer workers to produce goods.

Population Flight

The loss of jobs has cut the population by more than half in the last five decades. The city had about 1 million residents in 1950, according to the historical society Web site. Cleveland had the largest numerical decline in population from 2006 to 2007, the Census Bureau said on July 10. It now has about 438,000 residents.

Starting in the 1990s, Cleveland began turning around its reputation with the opening of new sports stadiums and the Rock and Roll Hall of Fame and Museum downtown. The area's financial services industry also grew and attained national prominence with firms such as National City, KeyCorp and insurer Progressive Corp. Manufacturing also rebounded as the weak dollar boosted demand for products produced in the area, DeKaser said.

Real Revival

George and Bridget Richard are first-time buyers who want to stay in the Cleveland area and are being enticed by newly affordable prices. After looking for more than a year, they're now considering placing an offer on a three-bedroom, three-bath house in North Ridgeville, a suburb of Cleveland.

A few months ago the asking price for the light-blue house, built in 1986, was $213,000. Now it's $189,000. The couple, who are high-school sweethearts, are expecting their first child.

``I'd like to take advantage of the market while it's low, go in, buy a house and just watch the market rise over the next number of years,'' Bridget Richard, 34, a child psychotherapist, said in an interview in the couple's apartment in Strongsville, Ohio.

To contact the reporters on this story: Brian Louis in Chicago at blouis1@bloomberg.net; Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

Last Updated: August 14, 2008 14:41 EDT