Existing Home Sales Plunge

(CBS/AP)  Sales of previously owned homes plunged in July to the lowest level in 2 1/2 years and the inventory of unsold homes climbed to a new record high, fresh signs that the housing market has lost steam.

The National Association of Realtors reported Wednesday that sales of existing homes and condominiums dropped by 4.1 percent in July from June to a seasonally adjusted annual rate of 6.33 million. That was the lowest level since January 2004.

The latest snapshot of housing activity was weaker than analysts anticipated. Economists were forecasting the pace of sales to fall to 6.55 million.

"The housing sector is fragile," said David Lereah, the association's chief economist.

Anyone buying now has to ask: Is a bubble about to burst?

"The hesitation on the part of sellers and the hesitation on the part of buyers has made for kind of a normal market," real estate agent Marcy Moyer told CBS News correspondent John Blackstone..

The median price of a home sold last month was $230,000. That was up just 0.9 percent from the same month last year and marked the smallest year-over-year increase since May 1995. The median price is the middle point, where half sell for more and half sell for less.

Sale prices are down 8 percent in Florida and 5 percent in California. Prices are slipping in other cities, too, CBS News correspondent Sharyn Alfonsi reports.

The inventory of unsold homes in July rose to a record high of 3.86 million. At the current sales pace, it would take 7.3 months to exhaust that overhang. That is the longest period to exhaust the supply of home since the spring of 1993.

On Wall Street, the weak housing report dragged stocks down. The Dow Jones industrials fell 41.04 points, or 0.37 percent, to 11,297.90. Combined with losses on Monday and Tuesday, the drop erased last week's five-day rally.

By region, sales dropped by 5.4 percent in the Northeast. They fell by 5.9 percent in the Midwest and 1.2 percent in the South. Sales declined by 6.4 percent in the West.

Wednesday's report shows that the bloom is off the rose.

Home builders, like Toll Brothers, are getting nailed, too, Alfonsi reports.

"Rather than reduce the price ... they're offering automobiles, televisions, trips, they'll pay part of the closing costs…" Lereah said.

For five years running, home sales had hit record highs as low mortgage rates lured buyers. But the housing sector has lost steam this year as mortgage rates have gone up and would-be buyers have grown cautious amid high energy prices and a slowing economy.

Against that backdrop, the Federal Reserve earlier this month decided to halt a rate-raising campaign that had pushed interest rates steadily higher over the last two-plus years to fend off inflation.

The Fed's goal is to raise rates sufficiently to thwart inflation but not enough to hurt the economy.

One of the things that Federal Reserve Board Chairman Ben Bernanke and his colleagues are watching closely is the housing slowdown. If home prices and sales were to crash, that could spell big trouble for the overall economy. Thus far, Bernanke has said the market's slowdown has been fairly orderly and smooth.

Lereah said he still expects a "soft landing" for the once high-flying housing sector. But he urged the Fed to leave interest rates alone and refrain from bumping them up again — as some analysts have said is a possibility.

The housing sector's transition from a red-hot market to a cool one has important implications for the overall economy.

Consumers who watched their homes rise rapidly in value over the last several years felt wealthy and more inclined to spend. They also borrowed against their homes — treating them like ATMs — to support their spending ways.

But with home values not going up as much now as the double-digit gains seen in the past several years, consumers have tightened their belts. That has contributed to a slowing in overall economic activity.

Recent reports underscore the housing slowdown's impact.

Toll Brothers on Tuesday reported a sharp drop in third-quarter profits. One day earlier Lowe's Cos., the nation's second-largest home-improvement chain, warned that a slowing housing market will hurt its earnings for the rest of the year.

The National Association of Home Builders reported last week that confidence among builders sank to a 15-year low.