The US housing market is continuing to deteriorate, and figures show a larger-than-expected drop in the sales of new homes, as well as a fall in the prices of existing homes. The current climate of instability for homebuyers means that the house market will continue to drag down the economy.

Housing starts declined in May for the first time in four months, according to the Commerce Department.

According to the National Association of Realtors (NAR), the national median existing-home price for all housing types was $223,700 in May, which is 2.1 percent below May 2006 when the median was $228,500.

Lawrence Yun, NAR senior economist, said “The market is underperforming when you consider positive fundamentals such as the strength in job creation, economic growth, favourable mortgage interest rates and flat home prices. It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market.”

A jump in 30 year mortgage rates is exacerbating the problems currently facing the housing market. The average U.S. rate for a 30-year fixed mortgage was 6.74 percent last week, up from 6.15 percent at the beginning of May, according to Freddie Mac, the second-largest source of money for home loans. That adds $116 a month to the payment for a $300,000 loan and about $42,000 over the life of the mortgage.

The increase in the mortgage rates by more than a half a percentage point, to 6.74 percent, is putting further strain on borrowers with the best credit, in the same way that a crackdown in sub-prime lending standards has limited the pool of qualified buyers.

According to a Commerce Department report, the US economy, the world's biggest, grew by 0.7% in the first three months of 2007, the weakest pace in four years, and down from 2.5% in the last quarter of 2006.

The US Federal Reserve has left its main interest rate unchanged at 5.25%, saying it had concerns that inflation may fail to "moderate". The weakening housing market was expected to play a part in the Fed’s decision on interest rates, but the Fed's rate-setting committee voted unanimously to leave borrowing costs where they were.

This was the eighth consecutive meeting where the Fed have left interest rates unchanged, and many analysts expect rates may now stay where they are for the remainder of the year.

The Fed warned that a "sustained moderation in inflation pressures has yet to be convincingly demonstrated".