U.S. home values on average rose 8.5 percent in the first quarter from a year ago on strong demand and low mortgage rates, but the gains have slowed sharply from prior quarters, Freddie Mac (FRE) said on Wednesday.

Nationally, home values increased by an annualized rate of 5.6 percent in the last quarter, compared with an upwardly revised 17.9 percent rise for the fourth quarter of 2003, the second largest buyer of U.S. mortgages said.

On Tuesday, the Office of Federal Housing Enterprise Oversight (search), which regulates Freddie Mac and Fannie Mae (FNM), released similar findings on first-quarter U.S. home values.

For the year, Freddie Mac forecast that average U.S. home prices should rise between 6 percent and 6.5 percent, as a better labor market helps to offset higher mortgage interest rates.

Freddie Mac estimates that home prices will rise at a healthy clip, as the supply of new homes will unlikely match the robust demand, the company said.

"Near record new home construction activity won't quite keep up with housing demand, so the annual national home price appreciation should be quite vigorous," Freddie Mac said in a statement.

The first quarter's strong increase in home prices should bode well for homeowners who want to borrow against their homes to spend or to pay down debt.

In 2003, homeowners unlocked $139 billion in home equity through "cash out" refinancings, which economists and the Federal Reserve (search) said supported U.S. consumer spending.

But rising mortgage rates from March lows have reduced refinancing activity.

Freddie Mac expects homeowners will cash out $114 billion in 2004, $25 billion less than last year.

The huge price appreciation in the fourth quarter was unusual, likely due to a large volume of refinancing activity in 2002 and earlier 2003, Freddie Mac said.

Typically, home prices nationwide grow about 2 percentage points to 3 percentage points faster than overall inflation.

"The first quarter 2004 values are following this general pattern," Amy Crews Cutts, Freddie Mac's deputy chief economist, said in the statement.

On a regional basis, Western U.S. states including Hawaii and California continued to lead the nation in home price increases, rising 14.3 percent from the first quarter 2003 to the first quarter of 2004.

During the same 12-month span, home prices in the West South Central region that includes Texas, Louisiana, Oklahoma and Arkansas, ranked last among the nine regional markets tracked by Freddie Mac. Home prices there appreciated 3.8 percent from the first quarter 2003 to the first quarter of 2004.