WASHINGTON (Reuters) -- Home sales will be a good deal weaker this year than earlier thought as potential buyers remain on the sidelines waiting for better deals, a national real estate group said Thursday.

The National Association of Realtors (NAR) said sales of existing homes were likely to drop 7.6 percent this year to 6.54 million. A month ago, the group thought existing homes sales would fall only 6.5 percent to 6.61 million.

The association, which said housing prices were likely to dip temporarily below year-ago levels, also revised and lowered its forecasts for new homes sales and housing starts. It said new homes sales looked set to drop a steep 16.1 percent to 1.08 million units, compared to a previous forecast of a fall to just 1.12 million.

NAR said builders were now likely to break ground on just 1.87 million units this year - 9.6 percent lower than last year's level and a bit below its prior 1.88 million forecast.

"This year sales are slowing, homes are plentiful and sellers are negotiating," NAR chief economist David Lereah said in a statement. "Under these conditions, we'll probably see prices dip temporarily below year-ago levels as the market works through a build-up in housing inventory."

"This is a normal pattern during a market correction, but home prices should return to positive territory within a few months and annual appreciation will be slower than historic norms," he added.

NAR said the median price for existing homes - the price at which half of homes sell for more and the other half for less - should grow 2.8 percent this year to $225,900.

But it said the median price of new homes would likely inch up just 0.2 percent to $241,400.

"The shift we've seen lately results from psychological factors with buyers on the sidelines trying to time the market," NAR President Thomas Stevens said in explaining the sharp shift in the group's forecast.