The deceleration should help ease some of the price pressures on would-be buyers. After slumping at the start of 2014, existing-home sales have picked up as price gains have slowed. But buying remains 4.3 percent below the July 2013 level, according to the National Realtors Association.
Price growth should continue to slow now that the recovery from the Great Recession has entered its sixth year. Many economists project that the Federal Reserve will begin to raise short-term interest rates in 2015 because the economy has strengthened, which could cause mortgage rates to rise from relative lows and make it more expensive to borrow.
"Rising mortgage rates won't send housing into a tailspin, but will further dampen price gains," said David Blitzer, chairman of the index committee at S&P Dow Jones Indices.
Even hot markets such as San Francisco—where a two-bedroom condominium can cost more than $1 million—are finding that price growth has slowed. Prices in that city rose 12.9 percent in June, compared with an annual growth rate of 18.4 percent in April.
The sharp price gains of the past few years had been part of a natural snap back in response to the devastating housing bust, which triggered the recession at the end of 2007. Still, the fallout from that downturn continues to cast a shadow over the real estate market.
Nearly 35 percent of homeowners are "effectively underwater" on their mortgages, meaning that they either have less than 20 percent equity in their homes or could not sell their properties and have enough money left over for a down payment on another home, the online real estate firm Zillow said Tuesday.
The consequence of this is that fewer homeowners are willing to list their homes for sale. The impact is disproportionately been felt among Generation X. More than 42 percent of this generation — 35- to 49-year olds— owe more on their mortgages than their homes are worth. Nearly a third of baby boomers between the ages of 50 and 64 are in the same predicament.
That in turn makes it harder for the younger millennial generation to afford homes, said Zillow Chief Economist Stan Humphries.
"Because so many homes are stuck in negative equity or are effectively underwater, the inventory of homes for sale is severely constrained, leading to more competition for those that are available," Humphries said. "And millennials likely don't have the resources to compete with cash offers or engage in bidding wars."
New construction is increasingly catering toward apartment rentals and high-end homes, pricing out many other would-be buyers.
The Commerce Department said Monday that new-home sales fell 2.4 percent in July to a seasonally adjusted annual rate of 412,000. New-home sales lost much of their upward trajectory toward the end of last year, hurt by modest wage growth and a bump in mortgage rates after the Fed initially signaled a shift in its policies.