The value of U.S. homes fell by 12.1 percent in the second quarter from a year earlier, but the rate of decline shrank for the first time since prices began to fall in 2007, real estate website Zillow.com said on Tuesday.

Even so, stabilization of the hard-hit housing market, which is seen as key to an economic recovery in the United States, is not yet in view, with mounting foreclosures and a high level of underwater mortgages still posing threats, Zillow said.

U.S. home values posted their 10th consecutive quarterly decline, falling to $186,500 on the Zillow Home Value Index, according to the second-quarter Zillow Real Estate Market Reports.

The report encompass 161 metropolitan areas and covers value changes in all homes, not just those that have recently sold.

Home values in the first quarter had fallen by 12.4 percent from the prior-year period.

But distress signals tracked by Zillow remain high, suggesting that for most U.S. metropolitan areas housing prices have not yet hit bottom.

While we are encouraged by the increasing sales in many markets and the overall improvement in the rate of decline of the Zillow Home Value Index, I hesitate to be overly optimistic for the near future, Stan Humphries, Zillow's chief economist, said in a statement.

Foreclosure resales are buoying overall sales numbers, but their low prices are keeping home values down, he said.

Sales of previously foreclosed homes accounted for 22 percent of all home sales nationally in June, and 29.2 percent of homes sold for less than the original purchase price, the report showed.

Reports of increasing mortgage defaults signal that foreclosures are likely to increase again and peak in mid-2010, Humphries said.

Increasing unemployment and high rates of negative equity should spur even more foreclosures, which will add to the already-high level of for-sale inventory that needs to be cleared before values begin to rise, he said.

In the second quarter, 23 percent of all owners of single-family homes with mortgages were underwater, meaning the amount owed on their mortgage exceeded the value of the home. That compared to 22 percent in the first quarter, Zillow said.

Negative equity has been one of the biggest banes for many homeowners, making them unable to refinance their loans and preventing some from selling their homes.

Nationally, the number of home sales in June fell 23.7 percent versus a year earlier, but June sales were up 3.8 percent over May. Additionally, in 39 markets home sales increased year-over-year, including Miami-Fort Lauderdale, Los Angeles and Phoenix, the report showed.

FLOOD OF FORECLOSURES LOOM

With the housing market showing strength in some regions, more supply may be in the pipeline.

In Zillow's separate second-quarter Homeowner Confidence Survey, 29 percent of homeowners said they would be at least somewhat likely to put their home on the market if they saw signs of a turnaround.

In total, 142 U.S. metropolitan areas experienced year-over-year home value declines, eight markets were flat, and 11 markets had year-over-year gains in home values, the reports showed.

While the abundance of affordable foreclosure properties is a boon for many first-time home buyers, there will likely not be a significant housing market recovery until more move-up and move-across buyers reenter the market, Humphries said.

Some markets, however, are giving signs of being near a bottom. Eighteen of the 142 declining metropolitan areas have posted at least three consecutive quarters of smaller year-over-year home value declines, with nine of those markets in California, the reports showed.

(Reporting by Julie Haviv; Editing by Leslie Adler)

Fall Mortgage