Sales of new homes were down 3% in June, with May's sales revised downwards.

June saw a seasonally adjusted annualized rate of 1.13 million new homes sold in June. This was slightly below the market prediction of 1.16 million.

May's numbers were revised down from 1.23 million, reported last month, to 1.17 million. This indicates that the housing market is seeing quite a slowdown after five years of record growth.

"While the downturn in housing is now undeniable, there is much uncertainty as to the net degree of drag this will have on the economy," said Michael Gregory, an economist for BMO Nesbitt Burns. "This will be one of the key things to watch during the months ahead, as it will partially dictate whether the Fed pauses through autumn."

Sales are down approximately 18% from last summer's peak. Year-to-date sales in the first six months of 2006 were down 11.9% when compared to the first six months of 2005.

"Sales are set to decline further so that they better approximate the signal being flashed by the home-builder survey," said Josh Shapiro, chief economist for MFR. He added that the home-builder survey has plummeted 46% in the past year.

The inventory of unsold homes has risen by 0.7%, to a record 566,000. This represents a 6.1 month supply at June's sales pace. Homes not under construction yet represented 19.8% of the inventory -- the highest percentage since 1991.

Builders are reportedly cutting prices and offering incentives in order to keep inventories from building. They are up 24% from January.

Builders have also cut their profit outlooks for the years. Cancellations are reportedly rising and confidence is at a low.

The median sales price is up 2.3% on a year-over-year basis, at $231,300, according to the Commerce Department. This is the weakest gain in three years.

It can take six months for a sales trend to emerge, says the govermnet. New-home sales have averaged 1.13 million for the past six months. The six-month sales average has fallen seven months consecutively.