Residential real estate prices declined less than forecast in the year ended May, another sign that the housing market is on the mend.

The S&P/Case-Shiller index of property values in 20 cities decreased 0.7 percent from May 2011, the smallest 12-month fall since September 2010, after dropping 1.8 percent in the year ended April, the group said today in New York. The median forecast of 29 economists in a Bloomberg News survey projected a 1.4 percent fall.

Stabilizing prices could help drive a housing market that's starting to recover three years after the end of the recession. Federal Reserve policy makers have said residential construction is a bright spot in the recovery, even as analysts say choppy sales of distressed properties are making it difficult to gauge the trend in home prices.

"Distressed sales have come down, and that's helping to put some support for home prices," Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York, said before the report.

Estimates in the Bloomberg survey ranged from declines of 0.8 percent to 2.6 percent. The Case-Shiller index is based on a three-month average, which means the May data was influenced by transactions in April and March.

Home prices adjusted for seasonal variations increased 0.9 percent in May from a month earlier, after rising 0.7 percent in April. Unadjusted prices climbed 2.2 percent in May as all 20 cities showed gains.

Market 'Stabilizing'

"We need to remember that spring and early summer are seasonally strong buying months, so this trend must continue throughout the summer and into the fall," David Blitzer, chairman of the S&P index committee, said in a statement. "The housing market seems to be stabilizing, but we are definitely in a wait-and-see mode for the next few months."

The year-over-year gauge provides better indications of trends in prices, according to the S&P/Case-Shiller group. The panel includes Karl Case and Robert Shiller, the economists who created the index.

Twelve of the 20 cities in the index showed a year-over- year gain, led by a 12 percent increase in Phoenix.

Atlanta led declines, with a 15 percent drop.

There were 2.39 million existing homes for sale in June, down from an average supply of 2.93 million in 2011 and 3.22 million in 2010, data from the National Association of Realtors show.

The same NAR report indicated the median price of an existing home climbed 7.9 percent to $189,400 last month, the biggest gain since February 2006.

Fiscal Cliff

Companies such as Weyerhaeuser Co. are concerned the so-called fiscal cliff at year's end — when tax cuts on wages, capital gains, dividends and estates are scheduled to lapse — as well as longer-term domestic fiscal policy will hurt growth.

"The good news for us this year is that the housing market seems to be shaking off that concern at this point in time," Daniel Fulton, Weyerhaeuser's president and chief executive officer, said on a July 27 earnings call. "We're encouraged, but I think we still have a confidence issue to deal with among home buyers and the general public because it not only affects homes sales, it affects retail sales and overall employment."

Borrowing costs remain attractive. The average rate on a 30-year fixed loan dropped to 3.49 percent last week, the lowest in data going back to 1972, according to Freddie Mac.

Federal Reserve policy makers, led by Chairman Ben S. Bernanke, meet this week to discuss whether further measures are needed to boost growth and push down an unemployment rate that's been stuck above 8 percent for 41 consecutive months — the longest stretch in the post-World War II era.

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