The pace of existing U.S. home sales fell more than expected in July as a measure of the supply of unsold homes was the highest in over 13 years, signaling a deepening housing sector downturn, a trade group report showed on Wednesday.

Sales of existing homes fell 4.1 percent in July, the fourth consecutive decline, to a seasonally adjusted annual rate of 6.33 million units from a revised 6.60 million unit pace in June.

The July pace, the slowest since January 2004, was 11.2 percent below the July 2005 pace of 7.13 million.

Wall Street economists polled by Reuters had expected home resales to slow to a 6.55 million unit pace from June's originally reported rate of 6.62 million units.

Analysts predicted more pain as lofty home prices in many areas correct, keeping buyers on the sidelines and slowing consumer spending. A deep enough slide could slow the economy enough to persuade the Federal Reserve to refrain from further rate hikes to curb inflation.

"This is another step down on the staircase, and we have a number of steps to go. I'd still use the word orderly, but we keep descending," said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

"I don't think this necessarily means the Fed is done, but it's one more sign that the housing market is going to be a drag on growth," he added.

U.S. Treasury debt prices briefly pared losses after the data, but this was outweighed by profit taking after an 8-week rally that has sent yields to four-month lows in recent days.

The data sent the Dow Jones U.S. Home Construction Index , a yardstick that measures home-builder performance, down more than 3 percent. Broader U.S. stock market indexes were also lower at midday.

MORTGAGE APPLICATIONS UP

U.S. mortgage applications rose for a third straight week as falling interest rates prompted homeowners to refinance loans. The refinancing increase offset a decline in mortgages to buy homes. The Mortgage Bankers Association reported its seasonally adjusted index of mortgage application activity last week edged up 0.1 percent.

Another key indicator of the U.S. housing market will be released on Thursday. Analysts expect new single-family homes sales to fall slightly to a 1.100 million unit annual rate in July from a 1.131 million rate in June. The Commerce Department will release the data at 10:00 a.m. EDT (1400 GMT).

According to the Realtors data, the national median existing home price for all housing types was $230,000 in July, up 0.9 percent from July 2005, the smallest year-on-year price gain since May 1995.

The supply of homes for sale at the end of July jumped sharply by 3.2 percent to 3.86 million units. This represented a 7.3 months' supply, the highest since April 1993.

NAR Chief Economist David Lereah said the increase in the supply of available homes so far this year was the sharpest on record.

"What we are experiencing right now is an inventory and price adjustment," Lereah said. The housing market is in transition, he said, "and there is pain in that transition."

Lereah said the slowdown represented both cooling of overheated high-priced markets and sales declines in some markets that were struggling with a slowing economy, such as Midwest manufacturing cities. Some "non-boom" markets that were exhibiting strength in recent months were now beginning to cool, he added.

Nonetheless, Lereah held out hope that if prices fall, it will draw buyers back into the market. "Buyers have lost confidence and they are on the sidelines," he said. "If prices continue to adjust, then it will draw buyers who are on the sidelines."

PRICES FALL IN NORTHEAST, MIDWEST, WEST

Existing home sales in West dropped 6.4 percent to an annual pace of 1.32 million in July and were down 18.0 percent from a year earlier. The July median price in the West fell 0.3 percent from a year ago to $348,000.

In the Midwest, sales fell 5.9 percent to a 1.43 million unit pace, as the median price fell 0.6 to $178,000. Sales in the Northeast fell 5.4 percent to 1.05 million units as the median price fell 2.1 percent from July 2005.

Sales in the South slipped just 1.2 percent to a pace of 2.53 million units, while the median price rose 3.2 percent $192,000.

Single-family home sales dropped 5.0 percent to a seasonally adjusted annual rate of 5.51 million in July from 5.8 million in June. The median existing single-family home price was $231,200, up 1.5 percent from a year earlier.

Existing condominium sales, however, rose 2.8 percent to a seasonally adjusted annual rat of 818,000 units from 796,000 in June. The median condo price was $225,600 in July, down 1.0 percent from a year earlier.

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By David Lawder

© Reuters 2006