WASHINGTON, Aug 11 (Reuters) - U.S. existing home sales fell for a second straight month in July, and a rebound is likely to be limited by higher mortgage rates and tight supply.

Home sales dropped 1.7% last month to a seasonally adjusted annual rate of 4.06 million units, the National Association of Realtors said on Tuesday. Economists polled by Reuters had forecast home resales slipping to a rate of 4.05 million units.

Existing home sales are counted at the closing of a contract. Last month's sales likely reflected contracts signed in May and June when mortgage rates resumed their upward trend after briefly pulling back amid the ongoing conflict in the Middle East. The average rate on the popular 30-year fixed-rate mortgage has jumped 71 basis points since the war started in February, data from mortgage financing firm Freddie Mac showed.

It averaged 6.69% last week, the highest level since July 2025. Higher mortgage rates are also discouraging some homeowners from selling, worsening the housing shortage. Many homeowners have mortgages with fixed rates below 5%. 

Home sales fell in the Midwest and South. They rose in the Northeast and were unchanged in the West. Sales increased 0.7% on a year-over-year basis in July.

"There's no doubt that the housing market would be thriving if average mortgage rates were to return near 6%," said Lawrence Yun, the NAR's chief economist.

Existing housing inventory decreased 1.9% to 1.54 million units. It was down 0.6% from a year ago. At July's sales pace, it would take 4.6 months to exhaust the current inventory of existing homes, unchanged from June and a year ago.

The median existing home price last month increased 2.0% from a year ago to $434,100. First-time buyers accounted for 29% of sales, down from 33% in June and slightly up from 28% a year ago. A 40% share in this category is needed for a robust housing market.

The median number of days on the market for listed properties edged up to 29 from 28 in June and a year ago. Distressed sales, including foreclosures, were unchanged at 2%.