The market reacted poorly to the release of the Standard & Poor's Case-Shiller home-price index for August, as homebuilder stocks plunged after investors learned that prices fell further.

Unadjusted home prices were down 3.5% year-to-year for the 10 major markets included in the Case-Shiller report. The 20-city index fell 3.8%, missing expectations for a 3.5% drop. Prices rose 0.2% in August when compared to the previous month, falling below the forecasted 0.4%.

Despite falling prices and historically low interest rates, the housing market has yet to bounce back in the midst of high unemployment and a large number of foreclosures. With little movement toward new home purchases, homebuilder stocks were down more than the rest of the market Tuesday.

KB Home (KBH) was down 7.6% during late afternoon trading. PulteGroup Inc. (PHM) was down 7.8%, while Lennar Corp. (LEN) fell 5.76%. Ryland Group Inc. (RYL) and Standard Pacific Corp. (SPF) were down around 5%, and Toll Brothers Inc. (TOL) fell 3.8%.

The Dow Jones Industrial Average was down 154.06, or 1.3%, but the Dow Jones builder index fell 2.8% as of late Tuesday afternoon.

The Conference Board’s consumer confidence report for October may also have put pressure on homebuilder stocks. Only 3.9% of respondents said they plan on buying a home within the next six months, the lowest response since December.

There may be some slight relief for home builders, as Credit Suisse said new home sales in September might inch up by 1% to reach an annualized 298,000. But at the current pace, 2011 would mark the worst year for new home sales since 1963.