House prices fell 1.7 per cent in the three months to the end of September, according to the S&P/Case Shiller index, one of the most closely-watched gauges of home values. This was the worst fall since the index started in 1987.
Home prices have been falling in 10 major US cities for 18 months since they peaked in May 2006, according to the index.
The third quarter drop left house prices down 4.5 per cent in September compared with the year before.
Falling house prices are undermining consumer confidence and encouraging homeowners to crimp spending. Consumer spending makes up about two thirds of the US economy.
The house price drop came as fresh figures showed consumer confidence in November dropped to its lowest since after Hurricane Katrina in October 2005. Expectations over the economic outlook have fallen to their weakest since the start of the Iraq war amid soaring energy prices and financial market volatility.