Weakest home sales in 4 years

NEW YORK (CNNMoney.com) -- Home sales slumped to a four-year low in May as prices slid further and the glut of homes on the market hit a 15-year high, a real estate group said Monday, noting buyers are being scared away by the weak housing market.

Existing homes sold at an annual pace of 5.99 million last month, down from a revised 6.01 million rate in April, according to the report from the National Association of Realtors.

It was the slowest pace of home sales since June 2003, although it was essentially unchanged from the original April reading.

Economists surveyed by Briefing.com had been forecasting a 6.0 million sales pace.

"I guess the only silver lining is that it didn't fall even more," said Stuart Hoffman, chief economist for PNC Financial. "I think it's way too soon to say the housing market has hit bottom, especially with the continued problems in subprime mortgages .The availability of financing is tighter for anything that's not a prime loan, and even with prime loans, mortgage rates are up. The inventory overhang is huge."

Even the Realtors' statement conceded the weakness in the current housing market.

"The market is underperforming when you consider positive fundamentals such as the strength in job creation, economic growth, favorable mortgage interest rates and flat home prices," said Lawrence Yun, the Realtors' senior economist, in the report. "It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market."

The Realtors' statement not surprisingly urged those thinking of a home purchase to act before the market starts to turn around.

"Buyers who've been on the sidelines may want to take a closer look at current conditions in their area," said Pat Combs, a Grand Rapids, Mich., Realtor and the president of the group in its report. "If they wait for sales to rise, their choices and negotiating position won't be as good as they are now."

But Mike Larson, real estate analyst with Weiss Research, independent investment research firm, said that he doesn't see anything on the horizon to bring the reluctant buyers into the market until the second half of 2008.

"I think that buyers are being rational," said Larson. "They can see that every third house is for sale and prices are coming down."

Larson said there is a risk that the market could enter a downward spiral, with the weakness scaring buyers out of the market, causing more weakness, scaring more buyers out of the market.

"We have all the ingredients there for the market to get worse -- scared potential buyers, tighter supply of financing, mortgages going higher, along with historically high inventory," he said. "Whether it's a nasty spiral or a slow bleed depends on the state of the economy. But prices are going to have to fall further to move these homes and get rid of this Everest-size glut of homes on the market."

The Realtors also reported that the median price of an existing home sold in the month was $223,700, down 2.1 percent from a year earlier. It marked the tenth straight month that the price has shown a year-over-year decline. Until the current slump in home prices began a year ago, it had been 11 years since home prices showed a year-over-year decline in the closely watched report.

The median price, which reflects the point at which half the homes sell for more and half sell for less, was up 1.8 compared to April, marking the fifth straight month that prices had showed a month-over-month increase. But those month-to-month comparisons are considered far more volatile and affected by seasonal selling trends than the year-over-year measure.

The decline in prices compared to a year earlier was widespread in this report, with only the Northeast reporting a modest 0.5 percent rise in home prices year over-year. The South, the region that has almost 40 percent of the home sales volume nationwide, saw a 3.8 percent price decline compared to May 2006.

The glut of homes for sale on the market rose 5 percent from April to 4.4 million homes, leaving an 8.9-month supply of homes for sale on the market. The last time the group estimated that many months of inventory for sale was June 1992.

The number of homes for sale is now 23 percent above year-ago levels, while the months' supply, based on the sales pace and the inventory, is nearly 40 percent above a year year earlier.

The reading comes the day before a government report on new home sales, which is seen as a more forward-looking take on the real estate market.

The weakness in home prices, and the large supply of homes for sales, has hurt the earnings and outlook for the nation's leading home builders, including Lennar (Charts, Fortune 500), D.R. Horton (Charts, Fortune 500), Centex (Charts, Fortune 500), Pulte Homes (Charts, Fortune 500), KB Home (Charts, Fortune 500) and Toll Brothers (Charts, Fortune 500).