May 29 (Bloomberg) -- Home values in 20 U.S. cities fell in the 12 months ended March at the slowest pace in more than a year as lower borrowing costs and an improving job market gave sales a boost.

The S&P/Case-Shiller index of property values fell 2.6 percent from a year earlier after a 3.5 percent drop in February, the group reported today in New York. The decline matched the median forecast of economists surveyed by Bloomberg News. The index rose from the prior month on a seasonally adjusted basis.

A comeback in the housing market might be under way. Homebuilders are reporting their most-improved spring selling season in seven years, propelled by record-low mortgage rates, job gains and shrinking inventories. At the same time the market faces challenges as mortgage credit is difficult to obtain and slow wage growth is keeping some would-be buyers on the sidelines.

“It’s hard for a meaningful recovery when you’ve got quite a few headwinds,” said Bose George, an analyst at Keefe, Bruyette & Woods in New York, said before the report. Total sales remain below their levels of two decades ago.

Estimates for the year-over-year change in the home price index for March ranged from declines of 1.5 percent to 3 percent, according to the Bloomberg survey of 31 economists. The Case-Shiller index is based on a three-month average, which means the March data were influenced by transactions in January and February.

Smaller Decline

The year-to-year decrease in March was the smallest since December 2010.

Home prices adjusted for seasonal variations increased 0.1 in March from the prior month, following a 0.2 percent gain in February. Unadjusted prices were little changed from the prior month.

Today’s report also included quarterly national figures. Prices covering all the U.S. decreased 1.9 percent in the first quarter from the same time in 2011 compared with a 3.9 percent drop in the year ended in the fourth quarter. They fell 2 percent from the previous three months before seasonal adjustment, and increased 1.1 percent after taking those changes into account, the best performance since the third quarter of 2009.

The year-over-year gauge for the 20-city index, begun in 2001, provides better indications of trends in prices than the monthly measure, S&P/Case-Shiller has said in the past. The panel includes Karl Case and Robert Shiller, the economists who created the index.

City Breakdown

Thirteen of the 20 cities measured had a year-over-year decline, led by an 18 percent plunge in Atlanta. Phoenix showed the biggest increase, with prices rising 6.1 percent in March from a year earlier.

Five cities reached new lows in property values since the housing slump began, including Atlanta, Chicago, Las Vegas, New York and Portland, Oregon.

Another measure of home values released last week showed gains. Prices rose 2.7 percent in the 12 months through March, the biggest year-over-year increase since November 2006, the Federal Housing Finance Agency reported.

Improving demand is helping prices stabilize. New-home purchases rose more than forecast in April, to a 343,000 annual rate, up 3.3 percent from a revised 332,000 in March, the Commerce Department reported last week. Sales of existing homes increased 3.4 percent to a 4.62 million annual rate in April, just shy of the 4.63 million in January that was the highest in almost two years, the National Association of Realtors reported.

Borrowing Costs

Record-low borrowing costs are among reasons purchases are picking up. Mortgage rates for 30-year loans fell to 3.78 percent on average last week, the lowest in Freddie Mac records dating back to 1971.

Toll Brothers Inc. is among the builders reporting growth in orders. The company, based in Horsham, Pennsylvania, beat estimates with its second-quarter profit of $16.9 million.

“We are feeling better than we have at any time in the past five years,” Executive Chairman Robert Toll said on a May 23 earnings call. “We would like to say we’re back, but we need a little more confirmation. Nonetheless, it sure feels good compared to the desert we’ve just crossed.”

--Editors: Carlos Torres, Vince Golle

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net