Jan. 25 (Bloomberg) -- Sales of previously owned U.S. homes fell more than forecast last month to the lowest level since March 2004, evidence of the end of a five-year housing boom that will slow the economy.

Purchases declined 5.7 percent to a 6.6 million annual rate from November's 7 million, the National Association of Realtors said today in Washington. Sales, which have been slowing from the record monthly pace reached in June, still finished 2005 at an all-time high.

While economists forecast a gradual decline in sales, December's slump raises the risk the slowdown could accelerate and become an even bigger drag on the economy this year. The drop puts Federal Reserve policy makers on notice that more interest rate increases may not be necessary, according to Christopher Low.

``Higher rates at this point risk turning the gentle decline of the second half of 2005 into a housing rout in 2006,'' said Low, chief economist at FTN Financial in New York. Recent housing reports ``make the most compelling argument for the Fed to stop raising the overnight rate.''

A rise in the supply of homes relative to sales, less home price appreciation and higher mortgage rates may also limit refinancing, which has been helping drive spending and economic growth, economists said.

Stocks Fall

Shares of home-improvement retailers including Home Depot Inc. and homebuilders D.R. Horton Inc., Centex Corp. and Pulte Homes Inc. declined.

The Standard & Poor's 500 Index fell 2.18, or 0.2 percent, to 1264.68 in New York, for its first drop this week. U.S. Treasuries fell, pushing yields higher. The yield on the benchmark 10-year note added almost 9 basis points to 4.48 percent.

The pace of home resales was slower than any forecast in a Bloomberg News survey of 59 economists. Purchases were expected to fall to a 6.87 million rate from a previously reported 6.97 million in November.

The Realtors group forecasts previously owned home sales to slow by 5 percent in 2006 from a record 7.072 million last year.

``Housing added solidly to growth last year but don't expect that to be repeated this year,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

The median price rose 10.5 percent in December from a year earlier to $211,000, the smallest year-over-year increase since a 10.3 percent increase in March.

Affordability

``Affordability will keep prices in check, but for as long as rates stay near historic lows and employment remains strong, I think pricing will stay strong,'' Bob Walters, chief economist at Livonia, Michigan-based Quicken Loans Inc., said before the report. ``We probably won't see the double-digit gains that we've seen.''

The supply of homes for sale, another measure of housing demand, fell to 2.796 million in December from 2.924 million the month before. The bigger drop in sales caused the months' supply of homes to rise to 5.1 months, the highest since April 2003, from 5 months in November.

Purchases of previously owned single-family homes fell 6.8 percent to a 5.72 million annual pace in December. Sales of condos and co-ops rose 1.6 percent to an 877,000 rate.

Home resales fell 11 percent in the West, 7.2 percent in the South and 2.6 percent in the Midwest. Sales in the Northeast were unchanged.

Mortgage Rates

The average rate on a 30-year fixed mortgage was 6.27 percent in December, up from a 2005 low of 5.53 percent reached July 1 and an average last year of 5.87 percent, according to Freddie Mac, the No. 2 buyer of mortgages. The rate has stayed above 6 percent since the middle of November.

Housing affordability fell for a second straight month in November, according to a report earlier this month from the Realtors association. The group will report on December affordability on Jan. 30.

The rise in prices and interest rates may explain why mortgage applications fell during the second half of last year, economists said. Applications to purchase homes fell 16 percent from a 12-month high reached in June, while filings for refinancing fell 45 percent from their yearly high, also reached in June, according to figures from the Mortgage Bankers Association.

Last week, the Commerce Department in Washington said builders broke ground on fewer new homes in December than in November. Fort Worth, Texas-based D.R. Horton Inc., the largest U.S. homebuilder, said earnings in the quarter ended Dec. 31 rose 29 percent, the slowest pace in five years.

`Leveling Off'

Interest rates have receded this month on signs that inflation is under control. That will help keep housing demand from plunging, economists said. The average rate on a 30-year mortgage fell to 6.10 percent last week, according to McLean, Virginia-based Freddie Mac.

``I would not expect any precipitous decline in housing,'' Fed Bank of St. Louis President William Poole said in a Jan. 20 interview, citing continued low real interest rates. ``I would expect it to just be leveling off, and you would see new sources of growth from business fixed investment.''

U.S. economic growth will slow this year as consumer spending and housing demand ebb, according to a Bloomberg survey of economists taken Dec. 23 to Jan. 9. The U.S. economy will grow at a 3.4 percent annual rate this year, down from an estimated 3.6 percent in 2005, the survey showed.

A survey of businesses by the 12 Fed district banks last week showed that there has been ``some cooling'' in the housing market in areas including southern California and San Francisco, even as other parts of the country, such as Oregon and Hawaii, ``have reportedly heated up further.''

Home resales, which account for about 85 percent of the residential real estate market, are tabulated at contract closings so they reflect buying decisions made a month or two earlier. Purchases of new homes are counted when a contract is first signed, making them a better gauge of current activity, economists said.

To contact the report on this story: Joe Richter in Washington at Jrichter1@bloomberg.net

Last Updated: January 25, 2006 17:01 EST