updated 7/27/2006 5:45:58 PM ET 2006-07-27T21:45:58

Sales of new homes fell in June for the first time in four months, and the government also lowered figures for May, providing further evidence the high-flying housing market is losing altitude.

The Commerce Department reported Thursday that new home sales fell 3 percent last month to a seasonally adjusted annual sales pace of 1.131 million units. It was the first decline since an 11.5 percent drop in February.

The government also cut its estimate of sales activity in May to a pace of 1.166 million units, substantially below its initial estimate of 1.234 million units.

Analysts pointed to the drop in sales last month and the downward revision for May as fresh evidence that housing is slowing considerably, due at least in part to impact of higher mortgage rates.

Sales of both new and existing homes set records for five consecutive years as the housing industry enjoyed a boom powered by the lowest mortgage rates in four decades.

But rates have risen this year as the Federal Reserve tightens credit conditions in hopes of slowing the economy and keeping inflation in check.

Mortgage rates retreated slightly this week. The 30-year mortgage dropped to 6.72 percent, down from a four-year high of 6.80 percent last week, but still a percentage point above where rates were at this time last year.

The latest drop in rates was credited to Fed Chairman Ben Bernanke, whose comments last week were interpreted as signaling that the central bank’s two-year string of rate increase could be ending.

The government reported that the median price of a new home was $321,300 in June. That was 2.3 percent higher than a year ago but 1.5 percent lower than in May.

Analysts said the drop in new home sales was consistent with the slowdown shown this week in sales of existing homes, which fell for the eighth time in the past 10 months.

“The housing market peaked a year ago and has been slowly deflating ever since,” said Mark Zandi, chief economist at Moody’s Economy.com. “We can expect another year of lower sales with price declines in some parts of the country.”

The decline in new home sales, which followed a small 0.5 percent increase in May, left the number of unsold homes at a record 566,000.

At the June sales pace, it would take 6.1 months to sell the backlog of homes, up sharply from the 4.3-month supply of unsold homes a year ago when the housing market was booming.

Economists are looking for new home sales to slow further as mortgage rates keep rising.

“Our view remains that sales will continue to slow over the course of this year and into next,” said Patrick Newport, an economist with Global Insight. “A soft-landing continues to be the most likely scenario.”

The big worry is that home sales will fall so sharply that it could send shock waves through the economy, much as the bursting of the stock market bubble in 2000 contributed to the recession the next year.

So far the decline in housing is contributing to an economic slowdown, but analysts they are not forecasting a recession.

In June, sales were weak in every section of the country except the West, which posted an 8.2 percent increase after a decline of 7.3 percent in May. Sales fell 11.3 percent in the Northeast and were down 7.9 percent in the Midwest and 6 percent in the South.

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