The National Association of Realtors reported that sales of existing homes fell by 4.1 per cent in July, to a rate of 6.3 million sales per year, the lowest figure since January 2004 and much worse than expected.

House price rises hit a ten-year low, with the average price rising by just 0.9 per cent year on year, the weakest figure since May 1995.

In another gloomy signal, a measure of the supply of unsold homes was the highest in more than 13 years. The supply of homes for sale at the end of July jumped by 3.2 per cent to 3.86 million units, equivalent to 7.3 months’ supply, the highest since April 1993.

David Lereah, the association’s chief economist, said that the housing sector was fragile. He said that he still expected a soft landing for the sector, but called on the Federal Reserve not to risk a crash by raising interest rates further.

“What we are experiencing right now is an inventory and price adjustment,” he said. The housing market was in transition, he added, “and there is pain in that transition.”

A slowdown in the housing sector is expected to weaken US consumer demand in the months ahead. Analysts expect that this will give the Fed room to break off from its series of rate rises when it meets next month, despite inflationary pressure in the wider economy.

Analysts predict more pain if high home prices in the US continue to fall back in the months ahead and if buyers stay away.

“This is another step down on the staircase, and we have a number of steps to go. I’d still use the word ‘orderly’, but we keep descending,” said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. “I don’t think this necessarily means the Fed is done, but it’s one more sign that the housing market is going to be a drag on growth.”

Explore Economics

• Autumn Budget 2007

• Budget 2008

• World Economic Forum

• The Times MPC

Times Recommends

• BA chief waives bonus after T5 fiasco
• Prospects of cheaper loans hit as Libor soars
• Rice price dives as US and Japan set to unlock grain pact