The ongoing rise in home prices, up for the sixth month in a row in July according to a widely followed index, is bringing some badly-needed support for an ailing U.S. economy.

The road back to economic health, though, is going to be a long one.

U.S. single-family home prices rose in July, though the improvement was not as strong as expected, a closely watched survey showed on Tuesday.

The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.4 percent in July on a seasonally adjusted basis, shy of economists’ forecasts for 0.9 percent, according to a Reuters poll.

On a non-adjusted basis, prices fared better, rising 1.6 percent.

Compared to a year ago, prices in the 20 cities were up 1.2 percent, beating expectations for 1 percent. It was the second month in a row year-over-year prices have risen.

Tuesday’s home price data confirmed “recent good news” about the sector, David Blitzer, chairman of the index committee at Standard & Poor’s, said in a statement.

“All in all, we are more optimistic about housing. Upbeat trends continue,” said Blitzer.

Home price rebound
Most economists think home prices have stopped falling and are slowly headed back up. But the recovery to pre-bust levels will take years.
SOURCE: S and P/Case-Shiller Index (Mar-2000=100)HomePriceIndexDec-1995Sep-1997Jun-1999Mar-2001Dec-2002Sep-2004Jun-2006Mar-2008Dec-2009Sep-20114080120160200

Some six years after the housing market collapsed, the forces of supply and demand that sent prices plummeting now appear to have laid a firm foundation for a sustainable recovery, according to many economists.

“The rise in home prices across the nation reinforces the view that housing is now leading rather than restraining the economy,” said Joel Naroff, chief economist at Naroff Economic Advisors

The U.S. housing market’s long slumber has been a major drag on the wider economy’s recovery from the 2007 recession. Now, as that market force shifts from a headwind to a tailwind, economists expect the housing revival to help boost economic growth in several ways.

“Strengthening in home prices is a plus for growth through various channels, including increased consumer spending because of wealth and confidence effects, increased incentive to buy before prices go up some more, and increased incentive to lend because of less chance of mortgages turning delinquent,” according to Jim O’Sullivan, chief U.S. Economist at High Frequency Economics.

Rising home prices have helped put consumers in a better mood. Consumer confidence jumped to its highest level in seven months in September as Americans were also more optimistic about the job market and income prospects, a private sector report showed on Tuesday.

Homebuilders are also feeling more upbeat.

Both home resales and groundbreaking on new houses rose in August, helping to lift business sentiment among homebuilders to a more than six-year high.

Housing starts rose 2.3 percent last month, the fastest in more than two years, and are up by more than 20 percent in the past year. But the gain follows a collapse that saw new home sales crash from a nearly 1.4 million annual rate in mid-2005 to fewer than 300,000 last year.

Foreclosure backlog
The recovery in home prices comes as the supply of “distressed” properties has begun to ease. Those include houses seized by banks in foreclosure and so-called “short sales,” in which a bank approves a sale for less than the outstanding mortgage balance. But with default rates still high by historical standards and a large backlog of pending foreclosures, those properties will continue to weigh on the market.

Capital Economics housing economist Paul Diggle figures the supply of homes for sale has fallen some 23 percent over the past year, while the pace of sales has picked up by 11 percent. That’s brought the number of homes on the market back down closer to historical levels.

“Supply may not fall much further, but with demand continuing to improve, the market will remain tight enough to sustain price gains,” he said.

Nationwide, Diggle expects price to close out 2012 with a gain of about five percent, after giving up some ground later this year as they typically have during the slower selling months in winter.

Demand for houses could also get a lift from the Federal Reserve’s recent move to force mortgage rates, already at historic lows, even lower. The Fed is hoping that cheaper credit will prompt potential home buyers to take the plunge.

The central bank’s announcement earlier this month that it would spend $40 billion a month to buy mortgage-backed bonds has already forced the yields on those securities sharply lower.

But for many borrowers, low mortgage rates aren’t the problem. Bankers have been demanding higher credit scores before approving loans, and with unemployment stuck above 8 percent, many would-be home buyers can’t get a mortgage.

Lower rates could also help spur the economy by helping existing homeowners with mortgages refinance to a lower monthly payment. But millions of them – roughly one in four – can’t get a new mortgage because they owe more on their old loan than their house is worth.

“It remains to be seen just how much of this fall (in mortgage rates) will be passed through to borrowers,” said Diggle. “And in any case, with rates already at record lows and credit still very tight, any fall probably won’t make a dramatic difference to the recovery.”

Rising home prices will slowly lift underwater houses back onto dry land. But the process will take years.

Nationwide, homeowners with mortgages owed some $689 billion more in the second quarter than their homes were worth, according to CoreLogic. But the recent uptick in home prices is providing some small relief; that number dropped by just $2 billion from the first quarter to the second quarter. Of all homeowners with mortgages, some 10.8 million – more than one in five – were still underwater in the second quarter, according to CoreLogic.

NBC News and Reuters contributed to this report.