Home sales are expected to remain soft in the near term after mortgage applications fell 7.9% in January and another 3.3% in February, Fannie Mae said in its March Economic Outlook report. The report also highlighted the pressure excessive housing inventory has placed on prices. "Sales of existing homes have risen during five of the past six months, and in January were up by 39% since reaching their cycle's low last July," the report said. "However, the bulk of the gain has come from distressed sales." The spring season, which usually is a robust time for home sales and building activity, could continue to deliver disappointing results with homebuilders' confidence stuck at depressed levels, the report said. "Underlying trends in homebuilding activity remain weak," Fannie Mae said. "Total housing starts rose sharply in January solely from a surge in starts in the volatile multifamily sector. Single-family starts fell to the lowest level since May 2009." Total construction spending also remained weak in the first quarter as the industry dealt with severe winter weather. "The picture for residential spending was seemingly healthy, rising by 5.1%," the report said. "However, the gain was largely a result of a surge in home improvement. Construction spending excluding improvements — a better measure of underlying trends than total construction spending — fell 2.6%." In terms of the overall economic picture, Fannie said the economy entered 2011 with less momentum than previously estimated. Looking ahead, Fannie said two fundamental risks remain: shocks from oil prices and further tightening of fiscal policy. Write to Kerri Panchuk.