Sept. 5 (Bloomberg) -- U.S. home-price growth slowed during the second quarter from a year earlier in the sharpest three-month plunge on record, according to a government report issued today that indicates this year's housing slump is deepening.

``The wheels are coming off the housing market,'' said Scott Anderson, an economist at Wells Fargo & Co. in Minneapolis.

Prices for single-family homes rose an average of 1.17 percent during the period, compared with 3.65 percent growth in the second quarter of 2005, according to a report issued today by Office of Federal Housing Enterprise in Washington. The drop was the biggest since the agency began keeping records in 1975. The report doesn't give an average price, only the percent of change.

The quarterly slowdown came during the ``spring selling season,'' when about half of a year's home sales typically occur, suggesting the housing market may be slowing more rapidly than economists including Anderson initially predicted. In 2005, the last of five record years for home sales and price gains, the second quarter was the strongest, according to Ofheo data.

Higher mortgage rates discouraged buyers and pushed the inventory of existing homes on the market to 3.86 million in July, the highest ever recorded, the National Association of Realtors said Aug. 23. The supply of new houses for sale in July rose to a record 568,000, the Commerce Department said Aug. 24.

``The housing market is cooling in a very significant way,'' Ofheo Director James Lockhart said in today's report.

The last time the three-month appreciation rate was slower was the fourth quarter of 1999 when the prices grew 1.12 percent, according to the report.

Five states showed price declines during the second quarter, led by Michigan, down 0.72 percent, Massachusetts, falling 0.44 percent, and Maine, dropping 0.2 percent. The biggest gainers were New Mexico, up 4.22 percent, Oregon, rising 3.99 percent, and Idaho, increasing 3.78 percent. New York rose 0.9 percent and New Jersey gained 1.85 percent.

Overstating Gains?

The housing sector may be weaker than the report indicates because the index excludes condominium and luxury home sales, said Robert Mellman, an economist at JP Morgan Chase & Co. in New York. The index measures changes of values for single-family properties that have loans bought or securitized by Fannie Mae or Freddie Mac. It excludes houses that have mortgages higher than $417,000, the maximum allowed in 2006 for loans bought by the government- chartered companies.

``To the extent that pricing at the high end of the market and pricing for condos are especially weak, the Ofheo index may be overstating price gains,'' Mellman said in a note to clients.

Sales of existing houses and condominiums declined to an annual rate of 6.69 million in the second quarter from a 7.19 million pace a year earlier, the National Association of Realtors said on Aug. 15. The median price for a condominium dropped 0.3 percent to $225,800 from a year ago, the first decline on record, while the median for a single-family home rose 3.7 percent to $227,500, the slowest pace in six years.

Contracts Plunge

Contracts to buy previously owned homes plunged in July by the most since the terror attacks of September 2001, the real estate trade group said in a Sept. 1 report. Its index of signed purchase agreements fell 7 percent to 105.6 after no change in June.

Home sales and construction account for 6 percent of the U.S. gross domestic product, said Michael Darda, chief economist at MKM Partners in Greenwich, Connecticut. Adding ancillary purchases such as new furnishings and renovations, the housing sector influences as much as 23 percent of GDP, according to the Joint Center for Housing Studies at Harvard University in Cambridge.

Rising home prices also spur consumer spending by loosening the wallets of homeowners who feel wealthier as their net worth increases, said Drew Matus, economist at Lehman Brothers Inc. in New York.

Consumer Spending

``If you believe consumers are spending some of the money they think they're getting from their homes, then you can anticipate if those home prices level off or fall,'' that consumer spending growth may slow, Matus said.

The average rate for a 30-year fixed mortgage was 6.78 percent in June, the highest since April 2002, according to Freddie Mac data. Last week, the rate averaged 6.48 percent.

Over the past half century, the average price of U.S. homes has risen 5 percent a year, according to Frank Nothaft, chief economist at Freddie Mac, the No. 2 U.S. mortgage buyer.

Home prices probably will increase 3.2 percent this year, a quarter of 2005's 12 percent pace, David Berson, chief economist of Fannie Mae, the largest U.S. mortgage buyer, said in an Aug. 16 forecast.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net

Last Updated: September 5, 2006 16:57 EDT