By Lucia Mutikani
WASHINGTON (Reuters) - Sales of previously owned U.S. homes fell to a six-month low in May and prices dropped 4.6 percent from a year ago, pointing to a housing market still struggling to regain its footing.
The National Association of Realtors said on Tuesday that sales slipped 3.8 percent month over month to an annual rate of 4.81 million units, the lowest since November.
It was the second straight month of declines. The drop was smaller than economists had expected, but the April sales figure was revised lower, leaving a report that was largely in line with expectations in financial markets.
While the fall in sales last month was partly due to tornadoes and flooding, with sales in the Midwest and South hit the hardest, it underscored fundamental weakness.
"It's indicative of the depressed housing demand that we have been seeing for some time and that's a function of the slow economic recovery and tight credit markets," said Michelle Meyer, an economist at Bank of America Merrill Lynch in New York.
The report was the latest to confirm a sustained weakness in the economy through the second quarter, which has been marked by a sharp slowdown in regional factory activity, soft retail sales and anemic employment growth.
But the smaller-than-expected decline in sales was yet another hopeful sign that the economy was set to regain momentum in the second half of the year.
HOME PRICES SEEN DEPRESSED
Stocks on Wall Street rose amid relief home sales had not dropped as much as had been expected, while prices for Treasury debt fell. The dollar slipped against a basket of currencies.
The report came as policymakers at the Federal Reserve opened a two-day meeting. Officials are expected to acknowledge the recent slowdown in economic activity, but they are likely to stick to their view that the soft patch is transitory.
The U.S. central bank's $600 billion government bond-buying program concludes at the end of the month. The Fed, which has been criticized for risking inflation, has set the bar very high for any more monetary stimulus.
In the 12 months to May, home resales were down 15.3 percent. The generally weak housing market tone was underscored by the median home price, which at $166,500 was 4.6 percent lower than a year earlier.
Analysts expect prices to remain subdued. Moody's Analytics chief economist Mark Zandi said on Monday he expected to see home prices rising only at the end of 2012, at the earliest.
The housing market is being squeezed by an overhang of unsold homes and a tide of foreclosures, which are depressing prices. There were 3.72 million previously owned homes on the market in May, excluding so-called shadow inventory.
But NAR chief economist Lawrence Yun struck a fairly optimistic note, saying he believed sales had reached their bottom for the year and he expected pending contracts for May to rise by at least 15 percent.
The pending homes sales report is due next week. Other economists are also cautiously hopeful.
"By the end of the year we think rising payrolls and low mortgage rates will have lifted sales a bit, but a strong recovery is not imminent," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
Foreclosures and short sales -- which typically occur at about 20 percent below market value -- accounted for about a third of transactions in May, down from 37 percent in April.
Cash purchases made up 30 percent of sales, while investors accounted for 19 percent of transactions.
Sales of multifamily dwellings declined 8.1 percent and single-family home units slipped 3.2 percent.
At May's weak sales pace, it would take 9.3 months to clear the inventory of previously owned homes on the market. That is up from a 9.0 months' supply in April.
A supply of between six and seven months is generally considered ideal, with higher readings pointing to lower house prices.
(Editing by Andrea Ricci)
