Existing-home sales fell in April, dropping 0.8% from March to an annual rate of 5.05 million. The number stands 12.9% below the pace set in April 2010, according to data released today from the National Association of Realtors (NAR).

The drop fueled a dramatic 9.9% jump in housing inventory, bringing existing homes for sale to 3.87 million—a 9.2-month supply at the current pace.

The pullback in sales was largely driven by a drop-off of investors, whose market share fell to 20% in April, from 22% the month before. As a result, all-cash transactions fell to 31% of sales, from 35% in March.

Low-ball estimates also took some of the blame for the dip. According to an NAR practitioner survey, 11% of Realtors had a contract canceled in April due to an appraisal coming in at less than the price settled on by a buyer and seller. Another 10% of Realtors saw a contract delayed due to a low appraisal, and 14% reported that an appraisal resulted in renegotiating the contract to a lower price.

The median price for an existing home among all housing types was up from March but dropped 5.0% year-over-year, to $163,700, due to downward pressure from foreclosures and short sales. Distressed properties accounted for 37% of sales for the month, according to NAR—significantly higher than the 26% of total sales that REOs and homes in the foreclosure process accounted for in 2010, according to RealtyTrac.

According to NAR, a distressed home typically sells at a 20% discount. According to RealtyTrac data, in 2010 the average foreclosure was sold for 28% less than the average non-foreclosed home. However, according to a survey of 2,018 U.S. adults by Harris Interactive released yesterday, the average respondent expected to pay 38% less on a foreclosed home than they would for a similar home not in distress. Of those polled, 36% thought a 50% discount would be fair. With 1.2 million homes in foreclosure and another 4 million loans in delinquency, the glut of distressed properties available will likely give buyers an upper-hand in negotiating a low price.

To make matters worse, Patrick Newport, U.S. economist at IHS Global Insight, pointed out in a press release today that April’s low numbers included a boost from buyers trying to avoid the 25 basis point increase in insurance premiums for FHA loans, which went into effect on April 18. The pending increase fueled a 20% surge in mortgage applications for government-insured loans during the four weeks prior to its effective date, then tumbled 26.6% the week after, Newport wrote.

Looking ahead, Newport foresees the higher FHA insurance premiums continuing to hurt demand, as well as a blow from higher rates once Freddie Mac and Fannie Mae lower the maximum conforming loan limit in October. And with house prices falling, down-payment requirements will get higher, he predicted.

“The good news is that it is not getting any worse,” Newport wrote. “The bad news is that it is not getting any better.”

Claire Easley is senior editor, online, for Builder.

Learn more about markets featured in this article: Greenville, SC.