U.S. home sales will drop in 2006 as mortgage rates climb and house prices inch up at rates far below those notched last year, a trade group said on Tuesday, noting the long-awaited housing slowdown has begun.

The outlook from the National Association of Realtors came shortly after luxury home builder Toll Brothers Inc. (TOL), widely seen as a bellwether for the housing market, slashed its sales forecast for the second time in three months.

Home builders' stock prices dropped and the U.S. Treasury market got a brief lift on worries about a slowdown.

The Realtors' chief economist, David Lereah, said sales of existing U.S. homes should slide 4.7 percent to 6.74 million units this year, down from a record 7.07 million in 2005. That would also be below the 6.78 million resales posted in 2004.

Sales of new homes should fall as well, down 8.5 percent to 1.17 million units from a 2005 record of 1.28 million, Lereah said in his monthly outlook.

Construction too will tumble to levels not seen since before 2004, Lereah said. He forecast 2006 housing starts at 1.87 million units, down 9.3 percent from the 2.06 million in 2005 and 4.2 percent from the 1.96 million in 2004.

The national median existing-home price for all housing types is expected to rise 5 percent to $219,200 — a far cry from recent double-digit annual gains that many economists said were unsustainable.

Still, Lereah said the housing market would remain strong by historic standards.

"Sometimes people lose sight of the fact that real estate is cyclical," he said. "Even so, sales will continue at a historically high pace with modestly higher interest rates as the year progresses, and 2006 is forecast to be the third strongest year on record."

The U.S. housing market surged for five years, shattering sales and construction records and sending home prices up more than 55 percent on average nationwide.

That growth helped the U.S. economy both by boosting construction and encouraging consumers to take some of the built-up equity out of their homes and spending it elsewhere.

As mortgage rates started to climb in September, the market began to cool, and recent economic data has pointed to sustained slowing in the sector.

Most recently, the Realtors said its index of pending home sales dropped in December to the lowest point in almost two years. The Mortgage Bankers Association said mortgage applications for the week ended January 27 fell for the first time in four weeks.

But Toll Brothers' move earlier Tuesday to cut its forecast for home sales led some market participants to question whether the housing sector was cooling faster that expected. It also sent Toll's stock down 2.85 percent in late morning trade.

Another housing market outlook is due from the chief economist at mortgage finance company Freddie Mac on Wednesday.