Wednesday, October 24, 2007

U.S. Economy: Existing Home Sales Decline More Than Forecast

By Bob Willis

Oct. 24 (Bloomberg) -- The U.S. housing industry slid deeper into recession last month as the August credit-market rout made it harder for buyers to obtain loans.

Sales of previously owned homes fell 8 percent in September to an annual rate of 5.04 million, the fewest since records began in 1999, the National Association of Realtors said in Washington. The decline was almost twice as steep as economists forecast, while the median price dropped the most in almost a year.

Traders added to bets that the Federal Reserve will be forced to cut interest rates again next week to prevent the two- year real-estate slump from bringing the expansion to an end. Stocks retreated and Treasury notes climbed.

``The worst isn't behind us, the worst is here right now,'' said Jonathan Basile, an economist at Credit Suisse Holdings in New York. ``Housing is going to be a significant drag on the third quarter and fourth quarter.''

Economists had forecast resales to fall 4.5 percent to an annual rate of 5.25 million from a previously reported 5.5 million pace in August, according to the median estimate of 76 economists in a Bloomberg News survey. The previous month's sales were revised to 5.48 million.

The median price fell 4.2 percent to $211,700, compared with September 2006.

``Chances are this is not the bottom for the housing market,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``The extent to which housing is spilling over to the broader economy is still unclear, and that's what the Fed will be trying to determine between now and next week.''

Futures Traders

Traders see a 100 percent chance the Fed will cut its benchmark rate by a quarter-point when policy makers meet Oct. 30-31. That's up from 88 percent yesterday and 54 percent a week ago, based on futures prices on the Chicago Board of Trade.

Stricter lending standards and higher borrowing costs are making it more difficult to qualify for loans, causing an increase in the number of unsold properties and pulling prices down. Some economists say falling home values, by making owners feel less wealthy, may reduce consumer spending.

``The credit freeze in August definitely impacted sales in September,'' said Lawrence Yun, a senior economist at the real- estate agents' group. The impact was greater on jumbo loans, or loans larger than $417,000, affecting high-priced areas such as California, Yun said.

The number of homes for sale at the end of the month rose to 4.4 million. At the current sales pace, that represented 10.5 months' supply, the highest since record keeping began in 1999 and up from 9.6 months in August.

Inventories Rise

The inventory of single-family homes represented a 10.2 months' supply, the most since February 1988.

Resales of single-family homes fell 8.6 percent to an annual rate of 4.38 million, the fewest since January 1998. Sales of condos and co-ops dropped 4.3 percent.

Purchases declined in all four regions, led by a 10 percent decrease in the Northeast.

The volume of mortgages issued this year will fall to the lowest since 2000, the Mortgage Bankers Association forecast on Oct. 17. Foreclosures doubled in September from a year earlier as subprime borrowers struggled to make payments on adjustable- rate mortgages, RealtyTrac Inc. said Oct. 11.

``We have a ways to go in the housing recession,'' Douglas Duncan, the Mortgage Bankers Association's chief economist, said last week.

Today's report corroborates earlier figures this month from the Realtors' association that the housing slump is worsening.

Contract Signings

Pending sales plunged 6.5 percent in August to the lowest level on record following an 11 percent plunge in July. The measure tracks contract signings, while the figures on sales of existing homes are based on closings, which usually occur a month or two later.

The real-estate agents' group this month reduced its sales forecast for the 10th time this year.

Fed Chairman Ben S. Bernanke last week said the drop in residential construction will be a ``significant drag'' on growth into 2008, though evidence of a broader impact on spending is limited. He reiterated that policy makers will ``act as needed'' to secure growth and contain prices.

Economists have lowered their outlook for economic growth this year since the August turmoil in credit markets. The economy will grow 2 percent, the least since 2002, according to the median forecast in a Bloomberg survey taken earlier this month. Economists had projected a 2.5 percent rate of expansion at the start of the year.

Construction Declines

Declining home construction has detracted from growth for the six quarters ended in June.

D.R. Horton Inc., the second-largest U.S. homebuilder, said Oct. 16 that orders in the fiscal fourth quarter plunged to the lowest in almost six years as customers backed out of purchases and banks restricted lending.

Chairman Donald Horton said in a statement that prospective buyers had more difficulty obtaining mortgages, hurting demand.

``Buyers continued to approach the home-buying decision cautiously,'' Horton said. ``We expect the housing environment to remain challenging.''

No comments: