(Home prices report updated with additional commentary and background information.)

NEW YORK (

TheStreet

) -- Home prices across the U.S. fell 2% in third quarter after rising 4.7% in the second quarter.

The S&P/Case-Shiller 20-city index of national home prices rose slightly in September on a seasonally adjusted basis, ticking up 0.6% after

a 1.7% gain in August and a 3.18% rise in July. But the uptick disappointed market watchers who expected the index to rise 1%, which would have been the smallest year-over-year gain since February.

"September was the fourth consecutive month where the annual growth rates moderated from their prior month's pace, confirming a clear deceleration in home price returns," the report showed.

>>Homebuilder Stocks: Behind the Numbers

Home prices remained 1.5% below their year-earlier levels and the 20-City Composite is down 32.6% from its peak in June/July of 2006. Through September, the index has recovered 5.9%.

Eighteen of the 20 cities measured in the index showed a decrease in home prices. "While housing prices are still above their spring 2009 lows, the end of the tax incentives and still active foreclosures appear to be weighing down the market," the report showed.

The S&P/Case-Shiller 20-city index is a moving three-month average, so data for September was swayed by data from August and July.

Several market watchers consider weakening home prices an ominous sign for the overall housing market.

"Another weak report, weaker than last month," said David M. Blitzer, Chairman of the Index Committee at Standard & Poor's. "Other than Tampa, Fla., there are no new lows this month but many analysts will argue that a double dip will be confirmed before Spring. While some of the bad numbers may reflect the end of the government's tax incentive for first time homebuyers, there are other problems weighing on the housing market."

"The national economy is certainly the number one issue for housing. Additionally, there is a large supply of houses on the market and further, hidden, supply due to delinquent mortgages, pending foreclosures or vacant homes. New construction is running at less than half the pace needed to meet normal demand, so a sustained recovery could be a ways off," Blitzer continued.

Neil Dutta, an economist at Bank of America Merrill Lynch Global Research in New York, told

Bloomberg

that "we're in for more downward adjustment on home prices," adding that "people don't want to buy a house when they think it's going to lose value. A return to a normal housing market is going to be measured in years, not months."

The housing market has been under tremendous pressure for some time, and demand fell further after the

springtime expiration of federal tax credits for homebuyers

that offered credits up to $8,000 for first-time buyers and $6,500 for those buying new primary residences.

>>4 Top Homebuilder Stocks: Life After the Tax Credit

A variety of factors have kept potential buyers from making home purchases in recent months despite

mortgage rates

at near-record lows. High unemployment, a lack of credit and the

expiration of federal tax credits for homebuyers are obvious reasons. The recent

foreclosure scandal also plays its part.

>>Mortgage Rates, Loan Applications Rise

Last week the Commerce Department reported that

sales of newly built homes unexpectedly fell 8.1% in October to a weaker-than-expected annual rate of 283,000.

>>New-Home Sales Fall 8.1% in October

The government data followed a report from the National Association of Realtors which showed that

sales of previously occupied homes fell 2.2% in October to a slightly better-than-expected seasonally adjusted annual rate of 4.43 million units.

>>Existing-Home Sales Fall 2.2% in October

Though the existing-home sales data came in a hair better than economists had forecast, October's rate of existing-home sales remained 25.9% below year-earlier levels "when sales were surging prior to the

initial deadline for the first-time buyer tax credit," the NAR said. July's rate of 3.84 million homes sold was a

15-year low.

Homebuilders began construction on 11.7% fewer homes in October to an annualized rate of 519,000, far worse than the expected contraction rate. Applications for building permits, meanwhile, inched 0.5% higher to 550,000, from 547,000.

>>Housing Starts Fall 11.7% in October

Pending home sales fell 1.8% in September, worse than expected and 24.9% lower than in the year-earlier month. A report on pending home sales in October is due out on Thursday. Economists expect the data to be flat after

a 1.8% downtick in the prior month.

>>Pending-Home Sales Fall 1.8%

Stocks in the homebuilder sector were mixed but mostly lower Tuesday morning.

The

SPDR S&P Homebuilders

(XHB) - Get Report

and the

iShares Dow Jones US Home Construction

(ITB) - Get Report

, exchange-traded funds that tracks the homebuilder sector, each fell 0.5% following the report on home prices.

Among individual builders,

PulteGroup

(PHM) - Get Report

traded 0.2% Higher in the first hour of trading,

Lennar

(LEN) - Get Report

0.7% and

KB Home

(KBH) - Get Report

0.6%.

D.R. Horton

(DHI) - Get Report

fell 0.2% and

Toll Brothers

(TOL) - Get Report

bid 0.1% lower.

The

SPDR S&P 500

(SPY) - Get Report

ETF lost 0.6%.

-- Written by Miriam Marcus Reimer in New York.

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Miriam Reimer

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