House prices in the US have fallen year-on-year for the first time in more than a decade as sales of existing homes fell for the fifth month in succession.

The latest slowdown in sales and fall in prices follows a report last week that construction of new homes and apartments fell by 6 per cent in August, pushing US building activity to its lowest level since 2003.

"We do expect an adjustment in home prices to last several months as we work through a buildup in the inventory. With sales stabilising, we should go back to positive price growth early next year," said David Lereah, chief economist at the National Association of Realtors.

The latest figures confirm a downward trend in the US housing market that analysts believe could affect equities in the coming months. Economists fear that the downturn could prefigure a sharp slowdown in the US economy as consumer spending suffers and an estimated 10 million jobs associated with the housing industry become more vulnerable.

With real wages almost stagnant in the US, a buoyant property market has been responsible for much consumer spending growth, as homeowners borrowed against the rising value of their property.

The median sales price fell 1.7 per cent in August to $225,000 (€176,000) from a year earlier, the first drop since April 1995, but Mr Lereah said most indicators pointed to a soft landing for the housing market.

"We've been anticipating a price correction and now it's here. The price drop has stopped the bleeding for housing sales. We think the housing market has now hit bottom," he said.

The Global Insight/National City Housing Valuation analysis reported last week that 40 per cent of US metropolitan housing markets remain "extremely overvalued" but that prices have been falling in some of the most overvalued markets.

"Significant slower appreciation, or outright declines, among overvalued markets are a signal that we are in the early stages of a correction. This rebalancing may still be a gradual one, without widely spread price declines. But since there remains such a large degree of overvaluation, we suspect this process is only just beginning," said Richard DeKaser, chief economist at National City Corporation.

California, Florida and parts of the northeast, the regions which experienced the biggest booms in recent years, are now showing the strongest signs of decline.

The decline in house prices comes as the US economy is slowing, with GDP growth expected to average an annual rate of 2.7 per cent in the second half of 2006, compared with 4.25 per cent in the first six months of the year. Nobel prize-winning economist Joseph Stiglitz last week expressed concern about the role of the property market in driving consumer spending.

"What worries me is how long we can sustain consumption on the basis of what we have sustained it in the last several years: by taking money out of your house," he said.