Sales of existing single-family, coop and condominium homes fell 3.5% in July to a seasonally adjusted annual rate of 4.67 million in July, significantly below Wall Street expectations of a rate of 4.9 million and the lowest level of the year, the National Association of Realtors reported Thursday. The rate remained 21% ahead of July 2010, when sales were depressed in the wake of the expiration of the federal home-buyer tax credit.

Prices fell as well, with the national median price slipping 4.4% year-over-year to $174,000. Distressed accounted for 29% of sales in July, compared with 30% in June and 32% in July 2010.

Single-family home sales dropped 4.0% to a rate of 4.12 million, 21.5% above the level of July 2010. The median existing single-family price was down 4.5% from July 2010 to $174,800.

Existing condo and co-op sales were flat at a rate of 550,000 in July, 17.3% above the 469,000-unit pace a year earlier. The median existing price fell 4.0% to $168,400.

First-time buyers accounted for 32% of sales in July, up from 31% in June but down from 38% in July 2010. Investors bought 18% of properties sold, down from 19% in June and July, 2010. All-cash sales accounted for 29% of transactions, flat with June. Repeat buyers were flat with June at 50% of the market.

Total for-sale inventory fell 1.7% to 3.65 million, a 9.4-month, up from a 9.2-month supply in June.

Sales in the Northeast rose 2.7% to an annual rate of 750,000, 19.0% above July 2010, with the median price down 6.8% year-over-year to $245,600. The Midwest was up 1.0% to a pace of 1.05 million, 31.3% above a year earlier, with the median price down 2.9% to $146,300. Sales in the South dropped 1.6% to 1.84 million, 19.5% ahead of last July, with the media price down 2.2% to $152,600. The West dropped 12.6% to a rate of 1.04 million, still 16.9% ahead of July 2010, with the median price down 7.1% to $208,300.

The Realtor group blamed the decline on tight credit and faulty appraisals.

"Affordability conditions this year have been the most favorable on record dating back to 1970, but many buyers are being held back because banks are offering financing to only the most highly qualified borrowers, ignoring a large share of otherwise creditworthy buyers," said Lawrence Yun, NAR chief economist. "Those potential buyers represent the difference between an uneven recovery and a much more robust housing market that could stimulate additional economic activity and create jobs."

NAR President Ron Phipps, a Realtor from Rhode Island, added, "For both mortgage credit and home appraisals, there¹s been a parallel pendulum swing from very loose standards which led to the housing boom, to unnecessarily restrictive practices as an overreaction to the housing correction. Beyond the tight credit problems, all appraisals must be done by valuators with local expertise and using reasonable comparisons--it doesn¹t make sense to consistently see so many valuations coming in below negotiated prices, often below replacement construction costs."

Phipps said banks are at fault for much of the appraisal problem. "Banks frequently request numerous sales comparisons, well beyond the customary three comps used in the past, with little consideration that some of those properties may be discounted foreclosures used to valuate a traditional home in good condition," he said. "To a great extent, banks are exerting influence on appraised valuations with negative impacts for both home sales and prices."

Adam Rudiger, home-building analyst at Wells Fargo, issued an explanation of the factors depressing the existing-home market in a research note to investors. In it, he wrote, "Some may argue there is a bifurcation between distressed and nondistressed home price declines (and also between new and existing markets). We agree one may exist in terms of actual realized transaction prices. However, as long as distressed sales continue to remain elevated (29% of July existing home sales) we believe pricing concerns, both from buyers, sellers, and lenders will persist, limiting mortgage availability and complicating appraisals. We see the only viable solution as a one whereby excess inventory, both rental and for-sale is absorbed. With new home inventory at all-time lows, the problems lie in the existing market. Accelerating household formations remain the key to a recovery and the market's ability to reduce this overhang. We note, year to date, according to the Census' Homeowner Vacancy Survey, household formations have been anemic at just 22,000."