Home prices in many parts of the country scream bargain, and mortgage rates haven't been this low for decades. So why are houses across the nation sitting on the market for so long?

Sales of previously occupied homes in the United States fell 27.2 percent in July from the previous month, the National Association of Realtors said Tuesday, the largest monthly drop in the four decades that records have been kept. The annual sales rate of 3.83 million was the lowest since 1999, and the pace for single-family homes, which accounted for the bulk of sales, was at its lowest level since May 1995.

Analysts said July's figures represented further fallout from the expiration of a popular federal tax credit that had fueled the market for much of the year.

From our vantage point, the first-time homebuyers credit pulled forward demand — by definition, this is what stimulus measures achieve — however, the issue this time is that there was so little demand to be pulled forward, the credit has left no demand for the summer, said Dan Greenhaus, chief economic strategist for Miller Tabak & Co. The result is exactly what we're seeing: a near, if not outright, collapse in housing.

Potential buyers are hesitating because they think home prices still have further to fall. Potential sellers — those with the stomach to put their homes on the market — are reluctant to lower their prices.

It really is a self-fulfilling prophecy, said Aaron Zapata, a real estate agent in Brea, Calif. If all buyers perceive that home prices are coming down, then they will stop making offers — and home prices will come down.

While the standoff plays out, home sales are plummeting — which has in turn sent the stock market reeling. Stocks fell for a fourth day Tuesday after the home sales report deepened worries that the economic recovery could be fading.

The Dow Jones industrial average lost 134 points and dipped briefly below 10,000 for the first time in seven weeks. The broader Standard & Poor's 500-stock index dropped to a seven-week low, and bond yields fell as investors sought out more stable investments.

The big shock is the housing numbers, said Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp. We probably should have expected that because the housing market has given a number of signs of weakness up to this point.

Sharp declines in home sales were recorded in each of the four regions tracked by the National Association of Realtors. Yet the pain is being felt unevenly from state to state and city to city. Some markets are rebounding even as others languish.

Sellers in sluggish markets such as Las Vegas and Chicago can expect to wait an average of more than five months to sell their homes, according to real estate brokerage ZipRealty Inc. It's even worse in Palm Beach, Fla., where it takes nearly six months, the longest in the nation. In healthier markets, such as San Francisco and Denver, the average wait is only about two months.

During the spring, government tax credits helped drive sales, especially among first- time buyers of less expensive homes. But since those incentives expired, the number of homes lingering on the market has swelled to nearly 4 million in July. At the current pace of sales, it would take about 12½ months to sell all those homes and get them off the market. A healthy level is six months.

The housing market is also being hampered by the weakening economic recovery. Unemployment remains stuck at 9.5 percent, and many potential buyers worry that they might not have a job with which to pay the mortgage.

Prices have also fallen because foreclosures are running about 10 times as high as before the housing bust. Although the average rate for a 30-year fixed mortgage has fallen to 4.42 percent, many people can't qualify because banks have tightened lending standards.

More broadly, the plunge in home sales is magnifying fears that a worsening real estate market could cause consumers to pull back on spending. The overall economy would suffer.

The housing market is undermining the already faltering wider economic recovery, said Paul Dales, U.S. economist with Capital Economics. With the increasingly inevitable double-dip in prices yet to come, things could yet get a lot worse.