U.S. home prices dropped 5.5 percent in the first quarter from a year earlier, the biggest decline in almost two years, as sales of discounted foreclosure properties undermined real estate values.

Prices fell 2.5 percent from the fourth quarter, the Federal Housing Finance Agency (FHFA) said today in a report. Economists projected a 1.2 percent drop from the previous three months, according to the median of five estimates in a Bloomberg survey.

The FHFA’s measure, based on properties with loans backed by mortgage financiers Fannie Mae or Freddie Mac, has fallen for 15 straight quarters as lenders seize homes and sell them at cut-rate prices that drag down overall values. Foreclosures and short sales, in which banks agree to let properties sell for less than their loan balances, have accounted for about 38 percent of transactions this year, based on the monthly average of data from the National Association of Realtors.

“Dumping foreclosures on the market and selling them at distressed prices affects the whole real estate market,” said Richard DeKaser, an economist at Parthenon Group LLC in Boston. “It puts downward pressure on prices, even for homes that aren’t in foreclosure.”

Foreclosures typically sell at a 28 percent discount to non-distressed properties, according to Zillow Inc., a Seattle-based real estate company.
 
About 6.4 million mortgages were either delinquent or in foreclosure in April, according to Lender Processing Services Inc., a Jacksonville, Fla.-based mortgage-transaction and data firm. Sales of previously owned homes fell 0.8 percent to a 5.05 million annual pace in April, the National Association of Realtors said last week.