Home sales at six-month low, showing weakness even in 'peak' season

US home sales declined in May to their lowest level in six months, as high gasoline prices and a tepid job market weighed on US consumers.

The housing market continues to struggle against several headwinds: a glut of homes for sale, a cool economy, and relatively tight credit conditions. Sales of previously owned homes fell to an annual pace of 4.8 million for the month, down from a revised April figure of 5 million units, the National Association of Realtors said Tuesday.

The median sales price in May was $166,500, which was up from April but 4.6 percent below its level a year ago.

Big picture: Housing remains a central trouble spot in the US economy, some five years after the peak of the housing boom.

The Realtors association pointed to severe weather, along with tight lending standards by banks, as important contributors to the May weakness.

"While these played a role, other housing indicators are pointing to weak demand as the main reason sales are sagging at the [start] of the peak selling season," Patrick Newport, a housing economist at IHS Global Insight, said in a report analyzing the new numbers. "Indeed, one reason credit is tight is because the demand is weak."

Banks, he says, are reluctant to lend on easy terms when the collateral on their loans has been declining in value.

Industry analysts aren't sure how much farther home prices will fall, with estimates ranging from very little to 20 percent. Here's why the housing weakness could persist – and an alternative scenario that tilts toward faster recovery.

The case for a protracted recovery is simply that real estate cycles are often drawn-out affairs, with long booms followed by long shakeout periods. High foreclosure rates still mean a high for-sale inventory. Many would-be buyers are now renting as they try to reduce their debt loads and repair their credit scores.

Sami Mesrour, an analyst at the investment firm Black Rock, recently estimated that the US housing market now has "excess inventory" of about 2 million homes, because the pace of home construction got ahead of itself during the prerecession boom years. He figures it will take nearly seven years before that excess is fully absorbed by the market.

The financial website Calculated Risk has reckoned the excess inventory might be a bit smaller, maybe in the vicinity of 1.5 million homes.

At the same time, some economists point to signs of progress – and say that faster economic growth (which many see later this year) could help the housing market heal more quickly.

Already, home prices have fallen enough that the ratio of home values to personal income has returned to traditional levels, according to Harvard University's Joint Center for Housing Studies.

The share of income that the typical family is spending to service their debts has also come down substantially from its peak a few years ago, Federal Reserve numbers show. And, although the foreclosure rate is still high, the pace of mortgage defaults has slowed nationwide over the past year.

Moreover, the excess-inventory problem is not uniform across the country. According to the analysis by Calculated Risk, it's worse in some Midwestern states (Michigan, Ohio, Indiana) and some Sunbelt states (Florida, Georgia, Nevada), while most states have a supply overhang that's not nearly as severe.

The road to recovery lies through an improving job market and improving credit. As more people get jobs, and more people repair their personal finances, the result will be stronger demand for houses and a stabilizing of prices. The big questions are how long it will take for that dynamic to kick in, and whether there will be bumps along the way.