Inventory glut rises as home sales drop

Sales of existing homes fell for a third straight month in May, dropping to the lowest level in four years, as the median sales price declined for a record 10th consecutive month.

In a troubling sign for the future, the inventory of unsold homes shot up to the highest level in 15 years, meaning more downward pressure on prices in the months ahead until the inventory glut is reduced.

Sales fell 0.3% from April to May to a seasonally adjusted annual rate of 5.99 million units, the National Assn. of Realtors reported Monday. Sales were down 10.3% from a year earlier.

The median price of an existing home sold last month fell to $223,700, down 2.1% from a year earlier. It marked the 10th straight price decline compared with a year earlier, the longest stretch on record.

In California, home sales decreased 25% compared with May 2006, while the median price of an existing home increased 4.8%, the state Realtors group said.

The drop in sales was in line with expectations, providing relief on Wall Street, where analysts had been braced for an even worse showing.

Economists predicted that home prices would probably head lower in the months ahead because of continued troubles in reducing the stockpile of unsold homes, which rose 5% in May to 4.43 million units. That was an 8.9-month supply at the May sales pace, a level that has not been seen since July 1992, the last time the country went through a serious housing slump.

“The only way we are going to chip away at this Mount Everest-sized pile of inventory is by price cuts and so far sellers haven’t been aggressive enough,” said Mike Larson, a real estate analyst at Weiss Research Inc. “Don’t look for a lasting bottom in the housing market any time soon.”

The sales decline was led by a 3.4% drop in the South. Sales also fell in the West, dropping 0.8%. Sales rose 5.8% in the Northeast and 0.7% in the Midwest.

Economists predicted further sales declines in coming months as housing is affected by sub-prime mortgage troubles, which have caused banks and other lenders to raise their qualification standards, making it harder for potential buyers to obtain financing.

Rising mortgage defaults also mean more homes get dumped on a glutted market.

Some analysts said they believed that the once-highflying housing market was going through a crisis of confidence. Sales of both new and existing homes set records for five straight years, prompting what many believe was a speculative bubble in some parts of the country as investors rushed in to buy properties in hopes of a quick resale to take advantage of home prices that were climbing at double-digit rates.

Lawrence Yun, senior economist for the Realtors association, noted that household formation had slowed. He said that implied many people had decided to put off buying a home and were doubling up in rental units or moving back home with parents.

“It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market,” he said.