By Lucia Mutikani

WASHINGTON (Reuters) – U.S home sales fell more than expected in June as a persistent shortage of properties pushed prices to a record high, suggesting the housing market was struggling to regain speed since hitting a soft patch last year.

Weak housing and manufacturing are holding back the economy, offsetting strong consumer spending. The National Association of Realtors said on Tuesday existing home sales dropped 1.7% to a seasonally adjusted annual rate of 5.27 million units last month. May’s sales pace was revised higher to 5.36 million units from the previously reported 5.34 million units.

“Meager inventory levels, especially in the entry-level segment, and still-rising prices continue to limit the selection of homes available to more budget-conscious buyers,” said Matthew Speakman, an economist at Zillow.

Economists polled by Reuters had forecast existing home sales slipping 0.2% to a rate of 5.33 million units in June. Existing home sales, which make up about 90 percent of U.S. home sales, decreased 2.2% from a year ago. That was the 16th straight year-on-year decline in home sales.

The weakness in housing comes despite cheaper mortgage rates and the lowest unemployment rate in nearly 50 years.

Supply has continued to lag, especially in the lower-price segment of the housing market because of land and labor shortages, as well as expensive building materials. The government reported last week that permits for future home construction dropped to a two-year low in June.

According to the NAR, there was a 19% drop from a year earlier in sales of houses priced $100,000 and below.

The Realtors group said there was strong demand in this market segment, but not enough homes for sale. The NAR also said last year’s revamp of the U.S. tax code, which reduced the amount of mortgage interest payments homeowners could deduct, was weighing on demand for homes priced at $1 million and above.

The 30-year fixed mortgage rate has dropped to an average of 3.81% from a more than seven-year peak of 4.94% in November, according to data from mortgage finance agency Freddie Mac. Further declines are likely as the Federal Reserve is expected to cut interest rates next week for the first time in a decade.

Last month, existing-home sales rose in the Northeast and Midwest. They tumbled in the populous South and in the West.

June’s drop in existing homes sales likely means less in brokers’ commissions, which suggests that housing probably remained a drag on the gross domestic product in the second quarter. Spending on homebuilding contracted in the first quarter, the fifth straight quarterly decline.

The Atlanta Fed is forecasting GDP rising at a 1.6% annualized rate in the second quarter. The economy grew at a 3.1% rate in the January-March period. The government will publish it snapshot of second-quarter GDP on Friday.

The PHLX housing index <.HGX> was little changed, underperforming a broadly firmer U.S. stock market. The dollar held near a five-week high against a basket of currencies. U.S. Treasury prices fell.

HOUSE PRICES RE-ACCELERATE

There were 1.93 million previously owned homes on the market in June, up from 1.91 million in May and unchanged from a year ago. The median existing house price increased 4.3% from a year ago to $285,700 in June, an all-time high. House price inflation had been slowing after a jump in mortgage rates last year dampened demand.

Last month, houses for sale typically stayed on the market for 27 days, up from 26 days in May and a year ago. Fifty-six percent of homes sold in June were on the market for less than a month.

At June’s sales pace, it would take 4.4 months to exhaust the current inventory, up from 4.3 months in May. A six-to-seven-month supply is viewed as a healthy balance between supply and demand.

First-time buyers accounted for 35% of sales last month, up from 32% in May and 31% a year ago. Economists and realtors say a 40% share of first-time buyers is needed for a robust housing market.

(Reporting by Lucia Mutikani; editing by Andrea Ricci)