Home sales fell 3.5 percent last month to a seasonally adjusted annual rate of 4.67 million homes, the National Association of Realtors said Thursday. That's far below the 6 million that economists say must be sold to sustain a healthy housing market.
And this year's pace is lagging behind last year's total sales. The 4.91 million last year were the weakest sales figures in 13 years.
The dismal report on home sales contributed to a rough day on Wall Street. Stocks plummeted in morning trading on fears that the global economy is slowing. The Dow Jones industrial average fell 500 points within the first hour of trading.
Falling home prices have kept many people from selling their houses and taking new jobs in growing areas. They have also made people feel less wealthy and that has reduced the consumer spending that drives about 70 percent of the U.S. economy.
Bigger down payments, tougher lending rules, high debt and a shortage of desirable starter homes have kept many would-be buyers away. Even some with good credit and enough money for a down payment are holding off because they are worried home prices will keep falling.
First-time homebuyers, who are critical to a strong and stable housing markets, increased slightly to 32 percent of sales. Normally, first-time buyers make up about half of all home sales. And their purchases of low and moderately priced homes allow sellers to move up to pricier homes.
Since the housing boom went bust in 2006, sales have fallen in four of the past five years. Declining home prices and super-low mortgage rates haven't been enough to boost sales this year.
The average rate on a 30-year fixed mortgage fell to 4.15 percent this week - the lowest level on records dating back to 1971.
Foreclosures and short sales - when a lender agrees to sell for less than what is owed on a mortgage - made up about 29 percent of all home sales last month, up from about 10 percent in past years. And a wave of foreclosures are being held up, either by backlogged courts or lenders awaiting state and federal probes into troubled foreclosure practices.
Investors have targeted foreclosures and other deeply discounted properties. Their purchases accounted for 18 percent of sales in July.
Some sales are falling apart at the last minute. Roughly 16 percent of home deals were canceled last month. That's four times the number in May and the highest level since such records began being kept more than a year ago. A sale isn't final until a mortgage is closed.
Buyers have canceled purchases after appraisals showed that the homes were worth less than the buyers' initial bids. Millions of foreclosures have made it harder to get accurate appraisals that all parties can agree on.
The median sales price fell in July to $174,000, according to the Realtors' group. June's large jump in sales prices was attributed to missing data that had not been collected from Phoenix, which has been hit hard by foreclosures and dropping prices.
Most economists say home prices will keep falling, by at least 5 percent, through the rest of the year. Many forecasts don't anticipate a rebound in prices until at least 2013.
President Barack Obama echoed those forecasts during a campaign stop Wednesday in Illinois on his Midwestern tour. He said a housing rebound will require "consumers and banks and the private sector working alongside government."
"It will probably take this year and next year for us to see a slow appreciation again in the housing market," he said.
Sales were uneven across the country. In May, sales rose 2.7 percent in the Northeast and 1 percent in the Midwest and fell 1.6 percent in the South and 12.6 percent in the West.