Aug. 23 (Bloomberg) -- Sales of previously owned homes in the U.S. fell more than expected in July, resulting in the biggest supply of unsold homes in more than a decade, as higher mortgage rates discouraged would-be home buyers.

Purchases declined 4.1 percent last month to an annual rate of 6.33 million, the lowest since January 2004, from 6.6 million in June, the National Association of Realtors said today in Washington. Sales fell 11.2 percent compared with a year earlier.

Rising mortgage rates, following a surge in prices during the five-year housing boom, have made home purchases less affordable than at any time in almost two decades, according to the Realtors' group. The Federal Reserve, which this month paused after two years of interest rate increases, is counting on an orderly contraction in housing to help slow growth.

``It's pretty broad-based softness, across all regions,'' said Carl Riccadonna, U.S. economist with Deutsche Bank Securities Inc. in New York. ``The Fed definitely has to be concerned at this point.''

Resales were expected to drop to an annual rate of 6.55 million, the median estimate of 61 economists in a Bloomberg News survey, from June's originally reported 6.62 million. Economists' forecasts ranged from 6.35 million to 6.75 million.

Unsold Homes

The number of unsold homes on the market at the end of July represented 7.3 months' worth at the current sales pace, the highest since 1993.

The median price of an existing home rose 0.9 percent in July from a year ago to $230,000, the Realtors group said.

The supply of homes for sale increased 3.2 percent to 3.86 million in July, taking the inventories up from the 6.8 months' worth at the end of June.

Sales of previously owned homes rose in just two of the prior 12 months through June. They averaged 7.05 million last year. Existing home sales account for about 85 percent of the housing market and are recorded when a contract is closed.

The focus now shifts to new home sales, a more timely indicator because transactions are counted when a contract is signed. A report from the Commerce Department tomorrow will probably show new home sales declined to an annual rate of 1.1 million in July from 1.131 million in June, according to the median estimate of economists in a Bloomberg survey.

Builder Confidence Plunges

The National Association of Home Builders/Wells Fargo's index of builder confidence plunged this month to the lowest level in 15 years, a report showed last week.

Toll Brothers Inc., the largest U.S. builder of luxury homes, said yesterday net income in the three months ended July 31 fell 19 percent, the first drop in four years. The builder cut its fourth-quarter profit forecast as rising interest rates hurt demand for its houses, which sell for as much as $1.5 million.

The 16-member Standard & Poor's Supercomposite Homebuilding Index, which includes Toll Brothers, has dropped 36 percent since the beginning of the year.

Resales of single-family homes fell 5 percent last month to an annual rate of 5.51 million, the report said. Sales of condos and co-ops rose 2.8 percent to an 818,000 rate.

Purchases fell in all regions of the country. They dropped 5.4 percent in the Northeast, 5.9 percent in the Midwest, 1.2 percent in the South and 6.4 percent in the West.

``We're more likely nationally to see a soft landing rather than a bubble bursting,'' said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies in Cambridge, Massachusetts. ``People are finding it more difficult, with higher mortgage rates, to buy a home. Rents are starting to go up again.''

Forecast to Decline

David Lereah, the Realtors chief economist, said the association will lower its forecast for existing-home sales this year. Previously, the group expected resales to decline 6.5 percent to 6.61 million in 2006, from last year's record 7.08 million.

Some economists predict prices will fall as more homes sit unsold, especially on the new homes market, where builders and investors may cut prices to get rid of properties.

``There's still some room for home prices to come down a bit,'' said Bob Moulton, president of Manhasset, New York-based Americana Mortgage Group. ``Buyers have much more of a choice now. All that inventory out there is going to force prices down.''

The Fed raised the benchmark interest rate 17 straight times since 2004 to control inflation, and left the rate unchanged at 5.25 percent on Aug. 8. While housing is slowing gradually so far, a sudden slump may hurt consumer spending, economists said.

`Fragile' Market

``It's very important that the Fed understand the fragile state of the housing market,'' Lereah said. ``It's very important that the Fed maintain the status quo, keep rates where they are.''

A recent study by the Chicago Federal Reserve Bank says the surge in the U.S. housing market since 2001 is linked to gains in wealth and the introduction of innovative mortgages and has little to do with speculative fever that characterizes bubbles.

``We currently are seeing a good deal of softening in housing markets, and home prices are increasing at a slower rate,'' Federal Reserve Bank of Chicago President Michael Moskow said yesterday in prepared remarks to the McLean County Chamber of Commerce in central Illinois. ``Even if prices did decline nationally, history suggests that the impact on consumer spending would be modest and gradual.''

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: August 23, 2006 10:19 EDT