Pending home sales in the Twin Cities area rose for the 13th consecutive month in July, but deeply discounted foreclosed homes continue to drag down sale prices.

Signed purchase agreements in the 13-county metropolitan area increased 16 percent from a year earlier, to 5,174, according to the Minneapolis Area Association of Realtors. Closed sales rose nearly 26 percent from a year ago, to 5,235.

But housing prices continue to suffer. The area's median sale price fell to $171,000 in July, down 18 percent from 2008 and down 27 percent from 2007. July's prices even slumped from June's median price of $173,500. Until last month, prices had been increasing since bottoming out in February at $150,000.

The association blamed the price decline on the high number of foreclosed homes on the market. About 44 percent of July pending home sales were of lender-mediated foreclosures and short sales, where the lender agrees to a sale for less than the amount of the mortgage.

While that percentage is far from ideal, it's better than earlier this year, when about 60 percent of pending sales came from foreclosures or short sales, said Steve Havig, president of the Minneapolis Realtors group.

The median sale price for traditional home sales, which excludes those lender-mediated, rose slightly from June to July, but at $213,150 is 6 percent less than a year ago.

Havig said traditional home-sale prices have been dragged down by buyers' price expectations, which are tainted from the buzz swirling around foreclosed homes.

"Anyone who was out there looking for a home felt entitled to a good deal," he said.

Even though conditions are improving, there is a lag time for home buyers' expectations, said Evan Hermodson, an agent at Edina Realty's Minneapolis Parkway office.

"A lot of buyers still have this flawed idea that there's a lot out there and it's all really cheap," Hermodson said.

Havig said that once the foreclosed homes are culled from the market, median home sale price will increase and the market will stabilize.

"Within a year we should be able to clear these things out of the system," Havig predicted of the foreclosures.

But Scott Anderson, a senior economist for Wells Fargo & Co., expects home sale prices to continue to drop until spring 2010, as high unemployment causes more foreclosures. The unemployment rate in Minnesota was 8.4 percent in June.

"We do expect prices to still decline modestly," Anderson said. "There will most likely be another spike of foreclosures into 2010."

Nationally, Moody's Economy.com, an independent economic analysis provider, predicted in a report that there will be 3.85 million defaults this year. Defaults are the first step in a foreclosure, though not all defaults lead to foreclosures. In 2008 there were 2.7 million defaults.

Alex Robinson • 612-673-7405