The National Association of Realtors said Thursday that home sales dropped 3 percent last month to a seasonally adjusted annual rate of 4.91 million homes. That's below the 6 million that economists say is consistent with a healthy housing market.
The housing market has been hobbled by foreclosures, weak demand and falling home prices. Last year 4.91 million previously occupied homes were sold, the lowest level since 1997.
Activity among first-time buyers accounted for 32 percent of all sales, the same as August. First-time buyers are critical to a housing recovery because their purchases of low and moderately priced homes allow sellers to move up to more expensive homes.
Homes at risk of foreclosure edged down to 30 percent of sales, from 31 percent in August. Many of the sales went to investors, who are buying homes under $100,000. Their purchases made up 19 percent of all sales last month, down slightly from 22 percent in August.
The large number of unsold homes and foreclosures on the market are sending prices lower and hurting sales, analysts said.
"Home prices continue to languish and now appear to be dropping again," said Steven Wood, chief economist at Insight Economics.
Many people are reluctant to purchase a home more than two years after the recession officially ended. Even the lowest mortgage rates in history haven't been enough to lift sales.
Some can't qualify for loans or meet higher down payment requirements. Many with good credit and stable jobs are holding off because they fear that home prices will keep falling.
Most economists say home prices will keep falling, by at least 5 percent, through the rest of the year. Many forecasts don't anticipate a rebound in prices until at least 2013.
The Obama administration is trying to expand a program that allows homeowners to refinance their mortgages. But economists say that will do little to help the depressed housing market.
Wealthy buyers are still purchasing homes priced at more than $1 million in the affluent Northeast and growing Midwest. And investors are scooping up dirt-cheap homes in the battered South and West for less than $100,000. They are specifically targeting foreclosures in hard-hit areas, such as Phoenix, Las Vegas and Tampa, Fla.
Alistair Bentley, an economist at TD Economics, said few people are interested in buying or selling while the U.S. economy struggles. As long as this continues, he said, investors will be "crucial to the housing recovery."
The high rate of foreclosures has made re-sold homes much cheaper than new homes. The median sales price dropped roughly to $165,400 in September from August. A new home is now roughly 30 percent higher than the price for a previously occupied home - almost twice the normal markup.
A key reason was the rise in foreclosures and short sales - when a lender accepts less than what is owed on the mortgage. Those homes sell at an average discount of 20 percent.
Even homes that are under contract and near closing are falling apart at the last minute. Contracts cancellations remained high in September, with 18 percent of Realtors saying they had at least one contract scuttled. That's unchanged from August and a record high.
Homes sales fell across most of the country. In the Northeast, sales rose 2.6 percent. But they declined 0.9 percent in the Midwest, 2.6 percent in the South and 8.8 percent in the West.
New maximum loan limits by government-controlled mortgage buyers Fannie Mae and Freddie Mac likely contributed to the large sales decline in the West. On Oct. 1, the maximum loan in high-cost areas fell from $729,750 to $625,500 and, in some areas, to $550,000. That means some buyers are unable to get mortgages in high-cost California cities where homes are more expensive, such as San Diego, San Francisco and Los Angeles.
The glut of unsold homes increased slightly in September to 3.48 million homes. At last month's sales pace, it would take 8.5 months to clear those homes. Analysts say a healthy supply can be cleared in six months.