Luke Mullins

After increasing last summer, U.S. home prices are drifting lower again -- a disconcerting development for property owners who had hoped that the real estate market had finally bottomed out.

The S&P Case-Shiller home price report, which was released Tuesday, showed that the U.S. National Home Price Index increased 2 percent in the first quarter from the same period a year earlier on a non-seasonally adjusted basis. (S&P says its non-seasonally adjusted data provides a more reliable snapshot of the housing market today.) The month-over-month figures, however, were less encouraging. Home prices in 20 major U.S. cities dipped 0.5 percent from February to March -- the sixth straight monthly decline for this index.

"The housing market may be in better shape than this time last year; but, when you look at recent trends there are signs of some renewed weakening in home prices," Standard & Poor's Index Committee Chairman David Blitzer said in a statement. "In the past several months we have seen some relatively weak reports across many of the markets we cover. Thirteen MSAs and the two Composites saw their prices drop in March over February."

The recent slide in home prices has taken place amid favorable housing market conditions. Real estate prices have fallen sharply from the peaks reached during the housing boom, making a home purchase more affordable to a wider swath of potential buyers. At the same time, 30-year fixed mortgage rates averaged an attractive 4.97 percent for the month of March. Even the labor market showed signs of stabilization, adding more than 160,000 new jobs in March. These forces -- in addition to a tax perk from Uncle Sam -- helped increase sales of previously-owned homes in March by nearly 7 percent from the previous month. "It is especially disappointing that the improvement we saw in sales and starts in March did not find its way to home prices," Blitzer said.

Mike Larson of Weiss Research blames the massive inventory of unsold homes for the weakness in prices. "With the supply overhang that we have, it shouldn't be a surprise that pricing isn't doing anything spectacular," he says. The most recent existing home sales report, for example, showed that the inventory picture deteriorated in April, with the months' supply of homes for sale increasing to 8.4 from 8.1 in March. "Sales were up, but inventory was up more, which is something you don't want to see," Larson says. "It tells you that there are sellers lurking in the wings, and as long as that is the case, you are not going to see real firmness in pricing." The alarming number of Americans heading into foreclosure will ensure that inventory pressure will continue to sandbag prices for some time.

Still, Ian Shepherdson, an economist at High Frequency Economics, expects home prices to move higher in the near term as buyers scramble to close transactions before the June 30 deadline for the homebuyer tax credit, which provides up to $8,000 for qualified buyers. "We think prices could dip in April but should be firmer in May and June as a [result] of the increase in sales generated by the tax credit," he said in a report. "That effect will then fade in the summer as sales drop back, and [prices] could easily head into the fall a bit lower than they are now."

Meanwhile, Patrick Newport of IHS Global Insight says the inventory overhang will prevent prices from hitting bottom until sometime next year. "In our view, the housing glut and foreclosures will drive the national Case-Shiller index down another 6-8%, with prices bottoming in 2011," he said in a report.