Underperform? What an understatement. The latest housing report from the National Association of Realtors shows that May's existing home sales were 10.3 percent below the same month's sales in 2006, exacerbated by a burgeoning 8.9-month supply of homes for sale. Home sales eased by 0.3 percent, essentially flat from April's numbers, to a seasonally adjusted annual rate of 5.99 million units.

That's all existing homes -- single-family, townhomes, condominiums and co-ops.

Lawrence Yun, NAR senior economist, says that "psychological factors are currently the biggest drag on the housing market," in addition to "a disruption from tighter credit for subprime borrowers."

Also intriguing, Yun says that "household formation has slowed dramatically since late 2006, implying that many people are doubling-up -- they’re adding roommates or moving in with parents."

That's scary because the Joint Center for Housing Studies at Harvard just noted in its annual State of the Nation's Housing 2007, that "household growth between 2005 and 2015 should exceed the strong 12.6 million net increase in 1995-2005 by some 2.0 million." Immigration will hit all-time records between 2005-2015.

The National Association of Home Builders says that "sustainable" demand suggests that approximately 1.8 million new homes should be built annually, yet due to recent excesses where builders built an oversupply that will take two years to work through, if builders cut their supply of new homes to 1.65 million.

With close to 1.5 million new households forming through 2015, the supply and demand should be about equal, considering that new housing is also built to replace existing deteriorating or obsolete housing stock.

However, household formation is trending under that projection. According to data from the U.S. Census, annual addition in household formation has been:

• 1.03 million in 2004

• 1.64 million in 2005

• 1.34 million in 2006

"In the first quarter of 2007 (compared to first quarter of 2006) ... only 415,000 has been added," says Yun, referring to a annually adjusted rate. "In other words, if the pace of household formation continues at the current rate, there will be only 415,000 new households for all of 2007."

So why aren't more households forming and why aren't they buying? Is it affordability? Fear of the homebuying commitment? Expectations that home prices will fall further? "I believe the slowdown in household formation (doubling-up) is due to people remaining sidelined from "housing bubble" fears," reasons Yun. "The job market is sound ... which should mean about 1.2 to 1.5 million new households. But that is not happening."

He continues, "The market is underperforming when you consider positive fundamentals such as the strength in job creation, economic growth, favorable mortgage interest rates and flat home prices. It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market."

The national median existing-home price for all housing types was $223,700 in May, 2.1 percent below May 2006 when the median was $228,500.

Yet in California, where home prices are defying gravity despite a slowing market, home sales decreased 25 percent in May in California compared with the same period a year ago, while the median price of an existing home increased 4.8 percent, said the California Association of Realtors. Closed escrow sales of existing, single-family detached homes in California totaled 366,370 in May down from the 488,260 sales pace recorded in May 2006.

But a down price trend may be developing. The median price of an existing, single-family detached home in California during May 2007 was $591,180, a 4.8 percent increase over the revised $563,860 median for May 2006, C.A.R. reported. But the May 2007 median price decreased 1.1 percent compared with April’s revised $597,640 median price. Year-over-year prices are holding up, but month-to-month prices may tell a different story.

Mortgage interest rates are up, but still well below the psychological 7.0 percent benchmark, which is the average interest rates have had for decades except for a period of double-digit interest rates in the early 1980s. According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.26 percent in May, up from 6.18 percent in April; the rate was 6.60 percent in May 2006.

NAR President Pat V. Combs says that higher inventories are helping to offset an affordability impact from higher mortgage interest rates. "Buyers who’ve been on the sidelines may want to take a closer look at current conditions in their area -- if they wait for sales to rise, their choices and negotiating position won’t be as good as they are now," she advises.

But with rising housing inventories, buyers may continue to sit on the sidelines until they see some overhang absorbed.

"The decline in sales continues to be driven by both tighter underwriting standards since the start of the year and the adverse psychological impact of news regarding foreclosures and the subprime situation," said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. "In particular, the lower end of the market -- which is the part of the market that is most affected by the subprime situation - has seen greater declines in sales and weaker prices than the higher end of the market. This will likely be a recurring theme in the coming months."

C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in May 2007 was 10.7 months, compared with 6 months (revised) for the same period a year ago.