The leading realty trade group on Wednesday cut its 2007 forecast for U.S. home sales and prices, saying both would slide this year with sales hitting a five-year low.

The National Association of Realtors trimmed its sales forecast for the fifth straight month and also widened its predicted drop in existing home values.

The cloudy outlook for the housing sector comes a day after credit ratings agencies said loans offered to borrowers with damaged credit are shakier than earlier thought.

Moody's Investors Service and Standard & Poor's said Tuesday that they had begun to slash ratings on more than $17.3 billion in subprime debt in news that made the stock market sputter.

Subprime loan failures are more widespread and happening faster than the two leading debt-review companies had expected.

Despite the concentrated losses in the subprime mortgage sector and a lagging housing market overall, a leading Federal Reserve Bank official said Wednesday that the national economy should return to steady growth by the end of the year.

The consequences of the declines in housing activity and house prices, in my view, have so far not derailed the prospect that economic growth will return toward trend at the end of 2007 and in 2008, said Philadelphia Federal Reserve Bank President Charles Plosser.

SALES SEEN SLUMPING

Sales of existing homes are seen at 6.11 million units this year, down from the 6.18 million units the industry group predicted last month.

Sales in 2007 will be the lowest since 2002 when 5.63 million existing homes were sold. However, even with the decline, this year would rank as the fifth highest on record, the group said.

The national median sales price for existing homes should ease by 1.4 percent to $218,800 this year. Last month the trade group said prices should slip 1.3 percent.

Today's housing market favors home buyers with a large inventory and soft prices, said Lawrence Yun, the trade group's senior economist.

Buyers now have an overwhelming advantage given the wide selection of homes available in many markets, he said.

The trade group said it expects the housing market to strengthen next year with an increase in sales and home values.

Existing-home prices should rise 1.8 percent in 2008 while sales should be up 4 percent to 6.37 million units.

New-home sales and prices also are expected to fall this year and then bounce in 2008, NAR said in its monthly economic outlook.

A separate report from the Mortgage Bankers Association on Wednesday showed mortgage applications increased last week, with a rise in demand for home purchases even as interest rates climbed.

The index of mortgage applications was up 1.1 percent but several analysts said it had fluctuated too much with up-and-down interest rates to be read as a bright spot for the sector.

New single-family home sales should drop to 865,000 this year from the 1.05 million sales in 2006 and then hit 878,000 next year. The median new-home price should decline 2.6 percent this year and rise 2.2 percent in 2008.

Housing starts, including multifamily units, are forecast at 1.43 million units this year and 1.44 million in 2008, down from 1.80 million last year, the group said.

U.S.