Aug. 27 (Bloomberg) -- Sales of previously owned U.S. homes fell to the lowest level in almost five years in July, and the glut of unsold properties climbed to its highest since 1991 as mortgage-market turmoil rippled through the housing industry.

With no recovery in sight for housing, lower property values and higher mortgage costs threaten to weaken consumer spending, economists said. The Federal Reserve this month acknowledged a growing risk to economic growth because of the rising cost of credit. An index of homebuilder shares fell to a four-year low.

Purchases declined 0.2 percent from the prior month to an annual rate of 5.75 million, the National Association of Realtors said today in Washington. While the retreat was less than forecast, inventories of single-family homes rose to the equivalent of a 9.2 months' supply. From a year earlier, existing-home sales dropped 9 percent.

``We are very likely to see home sales continue to drop,'' said Ethan Harris, chief economist at Lehman Brothers Holdings Inc. in New York, who accurately predicted the number. ``There's a big imbalance between supply and demand, with lots of people who want to sell and lots of hesitant buyers.''

Sales were projected to fall 0.9 percent to a 5.7 million annual rate, according to the median estimate of 74 economists in a Bloomberg News survey. Predictions ranged from 5.5 million to 6 million. Existing home sales averaged 6.51 million in 2006.

Median Price

The median price of an existing home dropped 0.6 percent in July from a year ago to $228,900, the Realtors group said.

The supply of homes for sale at the end of the month climbed 5.1 percent to 4.59 million. At the current sales pace, that represented 9.6 months' worth, up from 9.1 months' worth at the end of the prior month.

The inventory of unsold single-family homes rose to 3.85 million, representing a 9.2 months' supply, the most since October 1991.

``Unfortunately, worse news lies ahead,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. Stricter borrowing rules mean more foreclosures and fewer qualified buyers, which will be ``adding up to lower home sales and lower prices. It is hard to see a bottom before mid-2008.''

The Dow Jones Industrial Average fell 56.74 points, or 0.4 percent, to 13,322.13 after Lehman analysts cut their earnings estimates for Countrywide Financial Corp., the biggest U.S. mortgage lender. The Standard and Poor's Supercomposite Homebuilding Index dropped 4.7 percent to 396.28.

Single-Family Homes

Purchases of single-family homes declined 0.4 percent to an annual rate of 5 million. Sales of condos and co-ops rose 1.4 percent to a 750,000 rate.

The Midwest accounted for the decline in sales. Purchases declined 2.2 percent in the Midwest and were unchanged in the South. They increased 1 percent in the Northeast and 1.8 percent in the West.

Monthly figures on home resales are compiled from contract closings and may reflect sales agreed upon weeks or months earlier, while new home purchases are recorded when a contract is signed, making them a more timely barometer. Resales account for about 85 percent of the U.S. housing market.

New home sales unexpectedly rose in July for the second time this year, to an annual pace of 870,000, the Commerce Department reported Aug. 24. Purchases may show renewed weakness as turmoil in credit markets pushes some mortgage lenders out of business and prompts others to restrict lending, economists said.

The Fed cut the rate charged on direct loans to banks Aug. 17 to try to increase the availability of capital after global stock markets plunged on concern that the subprime default crisis will spread and destabilize the financial system.

``The downside risks to growth have increased appreciably,'' policy makers said in a statement that day, reversing their stance Aug. 7 that inflation was the greatest risk.

Rising Delinquencies

Delinquencies on loans to subprime borrowers -- or people with poor credit histories -- hit a five-year high in the first quarter, and builders started work on the fewest homes in a decade in July, recent reports show.

Tighter rules for loans ``could further dampen residential investment,'' Fed Bank of Richmond President Jeffrey Lacker said Aug. 21 in a speech in Charlotte. ``Recent data on actual housing market activity have dampened my optimism'' about a bottoming-out in the industry, he said.

Lacker also predicted ``the drag from housing will continue for some time.''

Economists agree the glut of unsold properties is unlikely to ease anytime soon, and will put pressure on prices to fall further. Prospective homebuyers are waiting for better bargains, while subprime defaults and rising foreclosures raise the risk that more houses will get thrown back on the market.

`Drag on Growth'

``This a very long adjustment process, and the recent tightening of credit has stretched it even longer,'' Lehman's Harris said. ``Housing continues to be a drag on growth.''

Toll Brothers Inc., the largest U.S. luxury homebuilder, said third-quarter profit fell 85 percent as the deepening housing slump cut sales, increased cancellations and forced the company to write down property.

``We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets,'' Chief Executive Officer Robert Toll said on a conference call Aug. 22. ``Traffic is pretty stinky out there.''

In wider repercussions, some firms are facing limited access to credit. Countrywide Financial Corp., the largest U.S. mortgage lender, had to tap a credit line from its banks after being shut out of the commercial-paper market. Bank of America Corp. last week agreed to invest $2 billion in the company.

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

Last Updated: August 27, 2007 17:02 EDT