July 22 (Bloomberg) -- U.S. home prices had the smallest annual drop in 10 months, signaling the free fall of property values is abating in the three-year housing slump at the center of a global recession.

Prices declined 5.6 percent in May from a year earlier and rose 0.9 from April, the Federal Housing Finance Agency in Washington said today. Economists expected a 0.2 percent drop for the month, according to the median of 16 estimates in a Bloomberg survey.

“We saw a rebound of home prices in some parts of the country in part because the share of distressed sales dipped,” said Thomas Lawler, a former Fannie Mae economist who’s an independent consultant in Leesburg, Virginia. “That’s not any solace to anyone losing his shirt.”

Five U.S. regions showed price increases in May from April, the FHFA said. Job losses and record foreclosures have deterred buyers and slashed U.S. home prices 33 percent since the July 2006 peak, according to the S&P/Case-Shiller index. The highest unemployment since 1983 and the biggest foreclosure rate on record thwarted government efforts to revive real estate demand.

The area that includes California had the biggest one-month gain from April, at 2.7 percent. The South Atlantic region that includes Florida saw a 1.4 percent increase in May. Prices in New England fell 2 percent and in the region that includes New York and New Jersey dropped 0.1 percent.

Regional Prices

Every region of the U.S. saw price declines in May from a year earlier, the FHFA said. California dropped the most, at 14 percent. The South Atlantic slid 6.6 percent and the New York and New Jersey region was down 4.3 percent.

“The distress in the housing market was not caused by unemployment, but now we are seeing a wave of delinquencies and foreclosures by people who, if they had kept their jobs, would be unlikely to default,” Lawler said.

The unemployment rate rose to 9.5 percent in June, the highest since 1983, bringing the total number of lost jobs to about 6.5 million since the recession started in December 2007, the Labor Department said. Home prices in 20 major U.S. metropolitan areas dropped 18.1 percent in April from a year earlier, according to the S&P/Case-Shiller index.

Federal Efforts

The Federal Reserve is trying to keep rates low and spark a housing recovery by purchasing as much as $1.25 trillion in mortgage-backed securities to free up funding for home loans.

Home-loan rates fell to a record low twice in April, helped by the Fed’s program. Rates started climbing in May along with Treasury yields on investor concern that a greater supply of debt being sold to fund government spending will fuel inflation. In June the average 30-year rate reached a 2009 high of 5.59 percent, according to Freddie Mac.

Last week the rate was 5.14 percent, down from 5.2 percent a week earlier, according to the McLean, Virginia-based mortgage buyer.

President Barack Obama has pledged to spend $275 billion to help keep as many as 9 million Americans in their homes. The government is offering incentives to servicers, the companies that administer loans, to modify terms for delinquent borrowers or refinance mortgages that exceed the value of homes.

Late Payments

Those efforts may not be able to keep up with the number of Americans falling behind on loan payments. The U.S. delinquency rate rose to a seasonally adjusted 9.12 percent in the first quarter and the share of loans entering foreclosure rose to 1.37 percent, the Mortgage Bankers Association said in a May 28 report. Both figures were the highest in records going back to 1972.

One in every eight Americans is now late on a home-loan payment or already in foreclosure, according to Jay Brinkmann, chief economist for the Washington-based bankers’ group.

U.S. foreclosure filings -- notices of default, auction or bank seizure -- rose to a record in 2009’s first half, according to RealtyTrac Inc., an Irvine, California-based seller of real estate data. More than 1.5 million properties, one in every 84 U.S. households, received a foreclosure filing, RealtyTrac said in a July 16 report. That was a 15 percent increase from a year earlier.

The FHFA index tracks price changes for properties financed with mortgages owned or securitized by government-controlled Fannie Mae, the largest U.S. mortgage buyer, and Freddie Mac, which is No. 2. It excludes foreclosed properties bought with cash or financed with so-called FHA loans guaranteed by the Federal Housing Administration.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

Last Updated: July 22, 2009 10:57 EDT