Home prices are falling faster as the economy slows and turmoil in the mortgage markets continues.

Prices fell an average of 1.7% nationwide in the first quarter from the final three months of 2007, according to the Office of Federal Housing Enterprise Oversight. The decline was the largest in the index's 17-year history. The government index, which is seasonally adjusted and based on data for home purchases, had dropped 1.4% in the prior quarter. Compared with a year earlier, home prices dropped 3.1% in the first quarter.

HOUSING DATA • Econ Blog: By Any Measure, a Bad First Quarter• Econ Blog: Ofheo vs. Case-Shiller: A Primer• First-quarter Ofheo report (PDF)

The price drops, which occurred in 43 states, "spell further erosion in home-equity levels and potentially more trouble for mortgage markets," said the agency's director, James Lockhart, who added that the declines may help potential home buyers. Areas that had the biggest price gains over the past decade now are experiencing the sharpest declines. Prices in California and Nevada declined more than 8% from the prior quarter.

A separate monthly index showed that prices fell 0.4% in March compared with February, and 3.7% from April 2007, when the index hit its highest point.

The Office of Federal Housing Enterprise Oversight index tracks sales of single-family houses purchased with mortgages guaranteed by home-loan giants Fannie Mae and Freddie Mac. (Executives of Fannie Mae and Freddie Mac told Congress they are finally bringing down interest rates on large mortgages. Please see article.)

Other nationwide indexes show steeper declines. The S&P/Case-Shiller index, which includes a broader variety of mortgages and which showed a nationwide drop of 8.9% in the fourth quarter from a year earlier, is set to release first-quarter figures next week.

"The OFHEO report shows the weakness in the housing market, but does not, in our view, fully portray the dire state of the market," Lehman Brothers economist Michelle Meyer said in a note to clients.

Separately, initial claims for jobless benefits declined 9,000 last week to 365,000, the Labor Department said. The four-week moving average -- a measure of the underlying trend -- increased by 5,000 to 372,250, indicating a slow deterioration in the job market. Continuing unemployment claims edged up in a sign that job seekers are having a tough time finding new work.

Write to Sudeep Reddy at sudeep.reddy@wsj.com

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