Sales of existing homes slumped to a six-month low in May even as prices continued to drop, a new industry report showed on Tuesday, underscoring the deep hole the housing market is stuck in.

According to the National Association of Realtors, existing home sales, which are completed purchases of single-family, townhomes, condos and co-ops, declined 3.8% in May to an annual rate of 4.81 million units -- the lowest level since November.

While alarming, the report actually beat expectations on Wall Street, which had anticipated a steeper decline of 5.9%.

The NAR also said April sales dropped by1.8%, more than doubling its original estimate of a loss of 0.8%.

Hurt by the tough economy, home prices have continued to tumble. The national median price for existing homes declined 4.6% last month from the year before to $166,500.

Even with recent economic softness, this is a disappointing performance with home sales being held back by overly restrictive loan underwriting standards, said Lawrence Yun, NAR chief economist. Theres been a pendulum swing from very loose standards which led to the housing boom to unnecessarily restrictive practices as an overreaction to the housing correction  this overreaction is clearly holding back the recovery.

Yun said tight lending standards overshadowed historically-low mortgage rates. According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage was just 4.64% in May, down from 4.84% in April and 4.89% the year before.

It's clearly not the cost of money that is the factor, it is the access to it, Peter Boockvar, equity market strategist at Miller Tabak, wrote in a note.

There were a few bright spots as the NAR said 31% of U.S. May existing home sales were considered distressed sales, down from 37% in April.

Yun predicted a better performance in the second half of the year, which he sees as being much stronger than the second half of 2010.

NAR said total housing inventory decreased 1% last month to 3.72 million existing homes, representing 9.3 months of supply.

U.S. stocks added to their gains on the release of the housing data as did several housing-related stocks like Lowes (LOW) and Pulte (PHM).

First-time buyers accounted for 35% of the homes purchased in May, down from 36% in May and well off the year-earlier mark of 46%.

NARs report showed single-family home sales slipped 3.2% last month, while condo and co-op sales dropped 8.1%.

Midwestern sales suffered the steepest drop, falling 6.4% from April and 22.7% from the month before.

The West was the only geographical area in the report not to see sales decline last month, posting flat sales at an annual pace of 1.17 million units. Still, that represents a 10% drop from the year before.

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