Harsh weather, tight supply sink U.S. home sales

* Home sales drop 5.1 percent in January to 1-1/2 year low

* Median price up 10.7 percent from year ago

* Supply improves, but first-time buyers increasingly scarce

By Lucia Mutikani

WASHINGTON, Feb 21 (Reuters) - Severe cold weather and a shortage of houses on the market pushed U.S. home resales to an 18-month low in January, the latest indication economic activity has hit a soft patch.

The National Association of Realtors said on Friday that home sales dropped 5.1 percent last month to an annual rate of 4.62 million units, the lowest level since July 2012.

The Realtors group said unseasonably cold weather was partly to blame, but it also acknowledged some fundamental weakness, with fewer homes on the market to choose from and higher mortgage rates and prices reducing affordability.

"Some housing activity will be delayed until spring," said Lawrence Yun, NAR chief economist. "At the same time, we cannot ignore the ongoing headwinds of tight credit, limited inventory, higher prices and higher mortgage interest rates."

The 30-year fixed mortgage rate is about a full percentage point higher than it was a year ago, even though rates have come down a bit since hitting a two-year high in September.

Sales tumbled in the Northeast, South and Midwest, which were hit by snow storms and ice last month. But they were down 7.3 percent in the West, an indication that other factors apart from the weather also weighed on sales.

Home resales, which peaked in July, have declined in five of the last six months, and in January were down 5.1 percent from a year-ago.

Economists had expected sales to fall to a 4.68-million pace last month and some were not convinced that the weather had played a major role in the January slump.

"The weakness in existing home sales has been going on for some time now and needs to be acknowledged, particularly by the Federal Reserve," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

"The few hawks on the Fed could be quickly silenced if housing doesn't turn around in a more definite and fundamental fashion soon."

The U.S. central bank has been reducing the amount of money it pumps into the economy through monthly bond purchases, and minutes of the Fed's last meeting in January showed some officials thought it might be appropriate to raise interest rates "relatively soon."

ROOM FOR OPTIMISM

Freezing temperatures have hurt home building, manufacturing and hiring in December and January.

While most analysts see the weather-driven slowdown in economic activity as temporary and expect growth to rebound in the second quarter, there are growing concerns that there may be some underlying weakness in the economy, particularly given that growth was already slowing towards the end of 2013.

Some economists are optimistic home resales will pick-up once the weather starts warming up.

"Although higher mortgage rates and prices have reduced affordability somewhat, it is still much better than it was at the height of the housing boom," said Gus Faucher, a senior economist at PNC Financial in Pittsburgh.

"Many potential buyers, concerned about their financial situation, have put off purchases, but are now looking to buy a home as the recovery has proceeded."

In January, the inventory of unsold homes on the market rose 2.2 percent from December, pushing the months' supply to 4.9.

While that was up from December's 4.6 months, it remained below the 6.0 months that is normally considered as a healthy balance between supply and demand.

With inventory still tight, the median price for a previously owned home rose 10.7 percent from a year ago.

Higher house prices and lack of stock were slowing sales in the lower end of the market. First-time buyers accounted for 26 percent of the transactions, the smallest share since the Realtors group started tracking the series in October 2008.

A market share of 40 percent to 45 percent is considered by economists and real estate professionals as ideal.

The NAR, however, believes the worst of the supply squeeze is over, noting that the stock of unsold homes increased 7.3 percent from a year ago.