Home price index shows a small gain in May

— -- Housing prices in May showed their first gain in three years, a sign that the beleaguered market may finally be turning around.

Home prices rose 0.5% in May from April, according to the Standard & Poor's/Case-Shiller home price index, which measures changes in the value of residential real estate in 20 cities.

It also comes on the heels of other promising signs that the market is stabilizing, including a smaller inventory of homes for sale and a continuing rise in home sales.

"This corroborates a lot of other economic indicators that have been telling us the housing market is in the process of turning around," says Bernard Baumohl at The Economic Outlook Group. "The worst is over."

After 16 consecutive months of record year-over-year price declines, beginning in October 2007 and ending in January 2009, the home price index has now shown four consecutive months of smaller annual declines.

Cities still struggling include Phoenix, where homes sales were down 34.2% from May 2008; and Las Vegas, where they were down 32%. San Francisco prices in May were 26.1% below a year earlier.

Among the best: Dallas and Denver have reported three consecutive months of prices that were higher than a year earlier.

But the housing market still is struggling. Home prices nationwide dropped 17.1% in May compared with May 2008.

"Year-on-year, the growth rates are still awful," says Brian Bethune, an economist at IHS Global Insight, in a statement, adding that "recent housing reports have been promising. This report may be the most promising yet."

Signs that the housing market may be hitting bottom could also mean a more optimistic outlook for the economy, since it was the nose dive in home values that helped launch the recession.

The positive housing data is also good news for lenders, who will see the value of their assets move higher, resulting in fewer losses on the balance sheet.

But economists say the big question now is whether the promising signs in the housing market will encourage homeowners enough to result in more consumer spending.