U.S. home prices in July rose for the third straight month, surpassing forecasts and suggesting that the housing market is stabilizing after a three-year plunge.

The S&P/Case-Shiller composite index of house prices in 20 metropolitan areas rose 1.6 percent in July from June, more than triple the estimate of a 0.5 percent rise found in a Reuters poll. The index rose 1.4 percent the month before, S&P said on Tuesday.

The 10-city index gained 1.7 percent in July after a 1.4 percent rise the previous month.

The data relieved investor concerns about the impact of a weak housing market on the economy and U.S. stocks opened higher. The U.S. dollar strengthened against the yen, while U.S. Treasury bonds added to losses after the stronger-than expected reading.

The upshot is that the housing market is starting to clear ever so slightly, said Pierre Ellis, senior economist at Decision Economics.

A record stockpile of foreclosed homes have been exerting pressure on home prices overall, but recent home sales reports show an easing up of the massive unsold inventory.

That sustains hope that housing will get to a stable place which is good news for consumer balance sheets and, ultimately, for the economy, Ellis said.

A first-time buyer credit of $8,000, which ends on November 30, has jump-started housing activity this year but there are concerns about the impact when this incentive disappears.

These figures continue to support an indication of stabilization in national real estate values, but we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer's Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures, David Blitzer, chairman of the index committee at S&P, said in a statement.

The monthly price increases helped the annual rates, with the yearly pace of declines in home prices slowing to a 12.8 percent drop in the 10-city index and 13.3 percent downturn in the 20-city index.

All 20 metro areas showed an improvement in the annual rate of decline in July compared with June. On a monthly basis, only Seattle and Las Vegas showed declines.

Average home prices across the United States are now at levels seen in the autumn of 2003.

Prices have plummeted 33.5 percent for the 10-city index and 32.6 percent for the 20-city index from the peak in the second quarter of 2006, S&P said.

Despite the overall improvement, annual rates for all metro areas and the two composites remain in negative territory, with 14 of the 20 metro areas and both composites in double digits, S&P said.

(Additional reporting by Ellen Freilich)