Realtor Leslie Zeisler, center, shows a home in Palo Alto, Calif., to Carol Uyeno and the potential buyer's 4-year-old daughter, Taylor Yamashita. A Moody's economist says California — as well as Arizona — can expect to see an especially sharp drop in home prices.

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WASHINGTON — Is this what a housing bust looks like?

New-home prices fell last month by the largest amount in 35 years, and owners are being warned to brace for further declines, especially in formerly hot markets.

After years of increases, some buyers say prices still are out of their range.

The Commerce Department reported that the median price for a new home sold in September was $217,100, a decline of 9.7 percent from September 2005.

That was the lowest median price in two years and the sharpest year-over-year decline since December 1970, providing dramatic evidence of the slowdown in the once-booming housing market. The report didn't break down price data by state or individual market. (The median price is the midpoint, where half sell for more and half sell for less.)

The price decline for new homes followed a report Wednesday that prices in the much bigger existing-home market also dropped on a year-over-year basis in September by 2.5 percent, the largest decline in records going back nearly four decades.

The price decline for new homes in September came while the sales pace picked up, rising by 5.3 percent to a seasonally adjusted annual rate 1.075 million homes.

It was the second consecutive increase in sales after three months of declines. But even with the improvement, sales activity is down 14.2 percent from a year ago.

Some potential buyers are holding off in hopes that prices will fall further. Russell Saimons, a financial adviser in Seattle, said that from what he could observe, home prices have not come down that much in his area, but "they're not increasing like they were a year or two ago."

Saimons, 37, said he wants to buy a home eventually, but "it probably won't happen for two to three years" because he expects prices to keep coming down.

Latonya Barbery, 33, a medical assistant in Old Bridge, N.J., said she has looked for a home for the past 18 months but found them still too expensive.

"They're asking too much for these little shacks," she told The Associated Press Thursday.

A recent AP-AOL real-estate poll found that 46 percent of those surveyed believed the housing market in their area still was overpriced.

The sharp slowdown in housing follows an extended boom in which the lowest mortgage rates in four decades powered sales of both new and existing homes to records for five straight years, helping to support the overall economy.

Analysts say further price declines are probable for both new and existing homes. A glut of unsold homes is forcing builders to throw in expensive incentives such as granite countertops and swimming pools.

"The housing market correction is in full swing, but it probably has another year to go before it bottoms out," said Mark Zandi, chief economist at Moody's Economy.com. "It is going to be painful because there are a lot of price declines to come."

Zandi said he is forecasting that prices of existing homes will drop by 3.7 percent in 2007, which would be the first decline for a full year since the Great Depression of the 1930s.

For many of the formerly hot markets along the Northeast coast and in Florida, California and Arizona, the price drops could be particularly severe given the double-digit gains in those areas in recent years. Zandi's firm is forecasting that prices will decline in 133 of the nation's 379 metropolitan areas.

Some analysts have worried that the bursting of the housing bubble could have an impact similar to that of the bursting of the stock market bubble in 2000, which contributed to the 2001 recession.

But former Federal Reserve Chairman Alan Greenspan told a Washington audience Thursday that the economy will rebound after going through a "very weak patch."

"Most of the negatives in housing are probably behind, us but we still have a way to go" before hitting bottom, Greenspan said. "We have too much inventory still."

Inventories of both existing and new homes did drop slightly in September but remain close to all-time highs.

The rise in new-home sales last month reflected a 23.9 percent jump in the West and a 6.9 percent gain in the South. Sales plunged 34.5 percent in the Northeast and were down 6.3 percent in the Midwest.