WASHINGTON (Reuters) - U.S. existing home sales fell more than expected in June as the median house price set another record high, but improving supply and declining mortgage rates offered hope that activity could rebound in the months ahead.

Home sales dropped 5.4% last month to a seasonally adjusted annual rate of 3.89 million units, the lowest level since December, the National Association of Realtors said on Tuesday. Economists polled by Reuters had forecast home resales would slip to a rate of 4.00 million units.

Home resales, which account for a large portion of U.S. housing sales, declined 5.4% on a year-on-year basis in June. The median existing home price soared 4.1% from a year earlier to an all-time high of $426,900, the second straight month it scaled a record high. Home prices increased in all four regions.

Home resales are counted at the close of a contract. Sales in June likely reflected contracts signed in the prior two months, when the average rate on the popular 30-year fixed-rate mortgage was above 7.0%.

The average rate on a 30-year fixed-rate mortgage dropped to a four-month low of 6.77% last week, down from 6.89% and matching the average during the same period in 2023, data from mortgage finance agency Freddie Mac showed. It has eased from a six-month high of 7.22% in early May amid hopes that the Federal Reserve will deliver a long-awaited interest rate cut in September.

"We're seeing a slow shift from a seller's market to a buyer's market," said Lawrence Yun, the NAR's chief economist. "Homes are sitting on the market a bit longer, and sellers are receiving fewer offers."

Sales tumbled 5.9% in the densely populated South. They plunged 8.0% in the Midwest, which is considered the most affordable region. Sales fell 2.1% in the Northeast and decreased 2.6% in the West.

INVENTORY RISE

Housing inventory increased 3.1% to 1.32 million units last month. Supply jumped 23.4% from one year ago.

A surge in insurance premiums across the country as weather-related claims rise is forcing some homeowners to put their properties on the market.

Nonetheless, entry-level homes remain in short supply and there is not enough new construction. The government reported last week that single-family homebuilding fell to an eight-month low in June, while permits for future construction were the lowest in a year. Many homeowners have mortgage rates under 5%.

Economists estimated that residential investment, which includes home building and sales, likely subtracted from gross domestic product in the second quarter, after adding more than half a percentage point in the January-March quarter.

At June's sales pace, it would take 4.1 months to exhaust the current inventory of existing homes. That was the highest level in more than four years and was up from 3.1 months a year ago.

A four-to-seven-month supply is viewed as a healthy balance between supply and demand.

"Supply and demand dynamics are nearing a balanced market condition," Yun said.

Properties typically stayed on the market for 22 days in June compared to 18 days a year ago. First-time buyers accounted for 29% of sales versus 27% a year ago.

That share remains below the 40% that economists and realtors say is needed for a robust housing market.

All-cash sales made up 28% of transactions, up from 26% a year ago. Distressed sales, including foreclosures, represented 2.0% of transactions, unchanged from last year.