AMSTERDAM—The slump in the Dutch housing market deepened in July as prices posted the steepest drop on record, highlighting the challenges facing the Netherlands ahead of next month’s general elections.

With prices now plumbing levels last seen in 2004, the downturn is weighing heavily on household consumption and has raised concern about the country’s huge mortgage debt pile, among the largest in Europe

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House prices fell 8% from a year earlier, statistics bureau CBS said Tuesday, the largest decline in the 17-year history of the agency’s house-price index. Prices fell 4.4% in June and 5.5% in May.

“This is more than we had expected. The rate of decline has been volatile, but this is bad news,” said Rabobank economist Maarten van der Molen.

House prices have fallen about 15% since their peak in August 2008 amid a stagnant economy, more stringent bank-lending criteria and weak consumer sentiment.

The fall in house prices in the Netherlands isn’t as severe as the housing crashes that have hit Ireland and Spain, but it remains one of the biggest threats to one of Europe’s so-called core economies. The Dutch economy grew 0.2% in the second quarter from the previous quarter, joining Germany and France in escaping the slump hitting their southern neighbors.

The Netherlands Bureau for Economic Policy Analysis, or CPB, expects gross domestic product to contract by 0.8% this year and return to a modest 0.8% growth rate in 2013. The CPB is an independent fiscal watchdog for the government and its economic adviser.

Regulators blame loose lending practices in the late 1990s and early 2000s and a tax relief program for home buyers that distorted the Dutch housing market. As a result, they say, the country’s banks have become too reliant on wholesale funding to finance their large mortgage books. At around €640 billion ($790 billion), Dutch mortgage debt is roughly the size of the country’s entire economic output last year.

The Dutch central bank warned earlier this year that a prolonged slump poses a risk to the financial system as banks could face rising loan losses and more trouble securing funding. It could also squeeze public finances, as the Dutch government guarantees around €140 billion in home loans.

Sales of existing homes climbed in July from an eight-month low, adding to signs U.S. housing may pick up in the second half.

Purchases of previously owned houses, tabulated when a contract closes, increased 2.3 percent to a 4.47 million annual rate, figures from the National Association of Realtors showed today in Washington. The data were posted on the group’s website ahead of the usual 10 a.m. release time. The median forecast of 73 economists surveyed by Bloomberg called for a rise to a 4.51 million rate.

Buoyed by cheaper properties and record-low mortgage costs, demand for real estate is bolstering the industry that helped trigger the recession. Minutes of the Federal Reserve’s latest meeting, due later today, will be a reminder that policy makers are monitoring data such as housing to determine whether the world’s largest economy needs more stimulus.

“This is a continuation of good news, but we’ve got to continue to build momentum,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who forecast sales would rise to 4.46 million. “The home sales numbers are going to continue to go higher. As much as the employment numbers aren’t great, they aren’t horrible either, so those that have jobs are feeling a little bit better about their situations.”

Stocks were little changed, after the Standard & Poor’s 500 Index briefly topped a four-year high yesterday, as Japan’s exports slid and Greece sought more time on changes while investors awaited the Fed minutes. The S&P 500 Index fell less than 0.1 percent to 1,412.4 at 10:37 a.m. in New York.

Survey Results

Estimates in the Bloomberg survey ranged from 4.3 million to 4.8 million. The prior month’s pace was unrevised at 4.37 million, the lowest since October.

The median price of an existing home jumped 9.4 percent from a year earlier, the biggest 12-month gain since January 2006, to $187,300 from $171,200 in July 2011, today’s report showed.

Compared with a year earlier, purchases increased 11 percent before adjusting for seasonal variations.

The number of previously owned homes on the market climbed 1.3 percent to 2.4 million. At the current sales pace, it would take 6.4 months to sell those houses compared with 6.5 months at the end of the prior month. The group said it considers 6 months’ supply “normal.”

Regional Breakdown

Purchases increased in three of four regions, led by a 7.4 percent gain in the Northeast. Purchases in the West were unchanged.

Minutes of the Fed’s latest meeting, due later today, will be a reminder that policy makers are monitoring data such as housing to determine whether the world’s largest economy needs more stimulus.

The central bank has said it will “closely monitor” economic data and financial developments, according to a statement after its July 31-Aug. 1 gathering, at which policy makers determined they “will provide additional accommodation as needed” to accelerate the expansion.

“Despite some further signs of improvement, the housing sector remains depressed,” the Fed statement also said.

Of all purchases, cash transactions accounted for about 27 percent, down from 29 percent in June. First-time buyers made up 34 percent of the total, up from 32 percent in July 2011. Under “normal conditions,” entry-level purchasers account for about 40 percent, the Realtors group said.

The Treasury Department has a favorite explanation for why its anti-foreclosure programs didn’t keep more people in their homes: the mortgage banks were too messed up to put the plans into effect.

Officials made that claim again in The New York Times’ assessment on Monday of the Treasury Department’s efforts to assist homeowners after the financial crisis.

But how accurate is this version of history? Could the Treasury Department be overstating the dysfunction in the banks to distract from its own failures or lack of will?

It’s important to understand that when introducing its programs, the government simply had to have the cooperation of the banks. They possess all the details of the loans, they collect mortgage payments, and their employees interact with borrowers when they fall on hard times. To hear the Treasury Department tell it, the banks were woefully ill equipped for the nettlesome task of assisting borrowers who had defaulted, or were close to falling behind.

From Binyamin Appelbaum’s article:

“They were bad at their jobs to start with, and they had just gone through this process where they fired lots of people,” said Michael S. Barr, a former assistant Treasury secretary who served as Mr. Geithner’s chief housing aide in 2009 and 2010. “The only surprise was that they were even more screwed up than the high level of screwiness that we expected.”

No doubt, there were substantial shortcomings in the banks’ mortgage servicing departments. But relying too heavily on this excuse can oversimplify the issue.

First, mortgage servicing after 2008 was concentrated in the hands of three large banks. That significantly reduced the number of institutions the Treasury Department had to deal with when getting its plans implemented. Moreover, one of those dominant banks, Wells Fargo, has long had a reputation in the market for being very efficient at mortgage servicing. At the least, this undermines the portrayal of an industry as uniformly hapless.

Second, from 2009 to 2011, despite the weak housing market, the major banks were taking in enormous amounts of mortgage revenue. In theory, the banks had more than enough money to invest in the systems and people needed to modify far more mortgages. The banks earn revenue when they sell mortgages to the government for a gain and they also earn money from regular servicing payments. Wells Fargo, Bank of America and JPMorgan Chase together earned $88 billion from those two sources from 2009 to 2011, according to an analysis of their financial statements.

Third, helping stressed mortgage borrowers was not an activity that was somehow foreign to the financial industry. Certain lenders in earlier subprime booms had learned how to get borrowers current on their loans. While the housing crisis presented problems on a scale that was exponentially larger, there were effective blueprints in the system for dealing with borrowers who had missed payments. Indeed, Countrywide, a top mortgage originator during the housing boom, said it had a special “home retention” unit in the early days of the crisis. In its 2007 annual report, its last before being assumed by Bank of America, Countrywide said:

Our Home Retention unit works with delinquent borrowers to bring their mortgages back to current status and avoid foreclosure if possible. Our objective in the loss mitigation process is to develop foreclosure prevention options that have the highest probability of successful resolution for the borrower and ultimately the investor. Countrywide uses multiple tools to evaluate borrower needs and reconcile them with investor guidelines in order to offer the borrower the most advantageous workout possible. These options include, but are not limited to: payment plans, payment forbearance, loan modification, acceptance of deed to the collateral property in lieu of foreclosure and acceptance of the net proceeds from the borrower’s sale of the property (also referred to as a short sale).

This is not to say that Countrywide was somehow ready to start slashing mortgage principals for thousands of troubled borrowers. But it does show that people knew what tools could be used. And these tools were well understood going into the crisis.

Analysts are hailing the beginnings of a recovery in the nation’s housing market. But to beleaguered homeowners, it will not feel like much of one for many months to come.

The number of existing homes sold rose 2.3 percent in July from the previous month, according to figures released Wednesday. Volume was up more than 10 percent from a year ago.

For several months, economic data and accounts from real estate agents across the country have calmed fears that the overall market could take another big step down, giving prospective home buyers some assurance that prices were stabilizing.

Yet the nascent recovery is still a convalescent one, with the pace of activity uneven and far below the levels reached before the bubble burst. Home prices remain under pressure in many markets.

In fact, Wednesday’s report from the National Association of Realtors showed that average sales prices actually dipped slightly from June to July. This seeming contradiction — increasing demand but anemic growth in home values — could represent a new normal in the housing market, experts said.

Real estate agents across the country cited the weak job market, stagnant wages and tight lending standards as continuing restraints on prices, despite pent-up demand and mortgage rates near record lows.

Even relatively optimistic observers like Michelle Meyer, an economist with Bank of America Merrill Lynch, foresaw only gradual improvements in home values. She expected home prices to rise 2 percent annually in 2012 and 2013, with momentum gradually increasing later in the decade. At that rate, the average home price would regain its 2006 peak in 2022.

“Inventory is lower and construction is incredibly depressed,” she said. “But it’s bumpy. We could see prices weaken slightly in the fourth quarter of 2012 and the first quarter of 2013.”

Joe Abbruzzese, a retired farmer from upstate New York, was in southwest Florida this week bargain hunting for a second home. “I wanted to get down here before the snowbirds arrive,” he said. He was looking at five or six properties in the low- to mid-$100,000s before he left New York, but by the time he arrived in Florida only one was left.

Mr. Abbruzzese said that while prices had increased in recent months, he was betting that they would rise still more after the presidential election restored some certainty to the country’s political course. “I think people are really scared right now; they’re not spending the money,” he said.

While new buyers might take comfort in the fact that deep declines in home values seem to have passed, more than 11 million current homeowners owe more on their mortgages than their homes are worth. In July, home sales were running at an annual pace of 4.47 million, an improvement over a year ago, but well below the high of 7.25 million reached in September 2005.

New-home sales also were picking up, lifting share prices for many home builders. On Wednesday, Toll Brothers reported a sharp rebound in profits, lifting its stock 3.8 percent.

A number of factors have helped nudge prices higher, including shrinking inventory — particularly on the more affordable end of the market. There is about a six-month supply of homes, according to the Realtors’ group, down from more than nine months last summer.

In California, the supply of houses has become so slim that agents protested a bulk sale of 500 foreclosed houses by Fannie Mae, the mortgage giant, saying there was no need to sell the homes at a discount to investors when there were retail buyers willing to buy them. (Most of the properties would not have been sold individually because they were occupied by renters.)

Concerns that a flood of distressed properties will soon hit the market were also receding.

Banks have been taking more aggressive measures to avert foreclosures, which have been declining for almost two years, according to RealtyTrac. Short sales, the practice of allowing homeowners to sell their property for less than they owe before the home reaches the auction block, are on the rise. Some banks have recently introduced “deed for lease” initiatives to convert delinquent owners into renters instead of evicting them.