The backlog of unsold new homes reached a record level last month, as sales slipped despite the warmest January in more than 100 years.
The Commerce Department reported Monday that sales of new single-family homes dropped by 5 percent to a seasonally adjusted annual rate of 1.233-million units last month.
That was the slowest pace since January 2005 and left the number of unsold homes at a record high of 528,000.
Analysts viewed the new data as further evidence that the nation's red-hot housing market, which hit record sales levels for five straight years, has definitely started to cool.
"The decline in new home sales in January makes it clear that there is some real softening in the housing market," said Joel Naroff, chief economist at Naroff Economic Advisors.
The 5 percent decline was bigger than expected, dashing hopes that the milder-than-normal January would help to bolster demand. The warm weather had pushed up the level of construction starts last month by 14.5 percent, the fastest rate in three decades.
But the new report showed that with sales lagging, the increase in building activity left a total of 528,000 new homes still for sale at the end of the month, a nine-year high.
Even with the softening in sales, prices were up in January with the median price climbing to $238,100, up 4 percent from December, but below the all-time high of $243,900 set in October.
For the past few years, home prices have been surging at double-digit rates, gains that analysts said will likely slow now that sales are softening and inventories of unsold homes are rising.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, predicted "real downward pressure on prices over the next few months."
David Seiders, chief economist at the National Association of Home Builders, said surveys showed that the number of builders who are throwing in various amenities for free to move homes has risen to 41 percent.
Seiders predicted that home price gains, which were running about 12 percent last year, will slow to about 6 percent this year.
He said a lot of this year's change will reflect less speculative investor activity and more sales spurred by people desiring to live in the homes. "Hopefully, that is all that is developing here," Seiders said.
Some economists are worried that with the inventory of unsold homes rising, there could be significant downward pressure on home prices, triggering a chain reaction similar to the bursting of the stock market bubble in 2000, a development that contributed to the 2001 recession.
But new Federal Reserve chairman Ben Bernanke told Congress this month that for now he was looking for a moderate slowdown in the housing industry, not a crash.
The 5 percent January drop in sales followed a revised 3.8 percent increase in December, which came on the heels of a 7 percent drop in November.
The biggest decline in sales was a 14.9 percent decrease in sales in the Northeast, which followed an even bigger 23 percent plunge in sales in December. Sales in the Midwest were down 10.8 percent after having risen by 21.2 percent in December.
In the South, sales fell by 10.3 percent in January, following a 1.2 percent gain in December.
Bucking the national trend, sales in the West posted an 11.3 percent increase in January after a 6.3 percent gain in December.
Mortgage rates have been rising gradually, with a 30-year mortgage now at 6.26 percent, according to the latest Freddie Mac survey. Many analysts think 30-year mortgages will rise to between 6.5 percent to 7 percent by the end of this year.
They think that increase will be enough to trim sales of both new and existing homes and slow the double-digit gains in prices seen in recent years. The National Association of Realtors reported this month that a record 72 metropolitan areas saw double-digit gains in home prices in the final three months of 2005 compared with a year earlier.