WASHINGTON -- Sales of previously owned homes fell for a third straight month in July to their lowest level in five months, the National Association of Realtors reported yesterday.

Existing home sales inched down 0.3% to a seasonally adjusted annual rate of 3.95 million units, following a much larger 3.6% decline in June, the group said. Sales have fallen five out of the first seven months of this year.

Sales in the Northeast plunged 4.8% to a 600,000 annual rate, and sales in the South declined 0.7% to 1.45 million a year. Meanwhile, the West gained 2.4% to reach 850,000 sales annually and the Midwest increased 1% to 1.05 million a year.

Analysts yesterday predicted further modest sales declines similar to the July decrease in the coming months for both existing and new homes in the wake of higher mortgage rates und expected slower economic growth.

Fixed-rate 30-year mortgages averaged about 8.6% in July, up from 8.4% in June, according to Mark Obrinsky, senior economist of the Federal National Mortgage Association.

Along with many other analysts, Obrinsky predicted a "general tapering off in the housing market" during the remaining months of this year. "Single-family home construction and sales will be subject to a slowly decelerating economy," he said.

However, economists don't think the housing market will fall off a cliff anytime soon because the economy is expected to continue growing, boosting household income, and housing is eXpected to remain affordable by historical standards.

Existing home prices actually fell slightly to a $138,600 annual average in July, only the second time this year they have fallen, according to yesterday' s report. Prices are up only 2% from a year ago.

"The market remains affordable, and the figures prove it," said Robert Elrod, president of the realtors group, in the report. "Even with fluctuations in mortgage rates, we are on track for the second best year on record for existing single-family home sales."

Some analysts predict that mortgage rates will drift downward slightly during the second haft of this year, thanks to slower growth and the Federal Reserve's willingness to raise short-term rates to fight inflation.

Both Obrinsky and Christine Chmura, chief economist of Crestar Bank, predicted that mortgage rates will be slightly lower at the end of 1994 than they are currently. "Mortgage rates may have seen their peaks," Chmura said.

On the other hand, Stanley Duobims, director of forecasting at the National Association of Home Builders, predicted that mortgage rates on average will continue rising gradually this year and on into next year.

Correspondingly, he also expects that the housing market will cool. "I do expect further declines in housing, but we'll maintain a very nice level of activity," Duobinis said,

Existing home sales have very little effect on gross domestic product because sales of pre-existing assets are not counted as economic growth. Nonetheless, analysts say these sales are important because many families can't purchase a new home until they sell their old one.

The housing market is one of the first places where shifts in monetary policy are felt. Despite five rate increases so far this year by the Fed, however, other housing figures remain mixed.

New home sales fell 14% in June, but year-to-date sales are still up over 6% compared with the same period last year. Also, housing starts grew 4.7% in July, and year to date were up more than 16% compared with 1993.

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