U.S. Economy: Pending Home Sales Slide to Record (Update3)
By Bob Willis
Oct. 2 (Bloomberg) -- The number of Americans signing contracts to buy previously owned homes dropped to the lowest level on record in August as the housing recession deepened.
``The existing homes market is now in freefall,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., in Valhalla, New York. ``The downside from here is still substantial.''
The National Association of Realtors' index of signed purchase agreements fell 6.5 percent from the previous month, the group said today in Washington. The decline was more than economists anticipated and pushed the measure to the lowest level since the organization began tracking purchases in 2001. The gauge plunged 11 percent in July.
Higher credit costs and lending restrictions after the collapse in subprime mortgages may push the industry downturn well into 2008. Market futures contracts show the Federal Reserve will probably cut rates later this month to avert spillover from the credit squeeze and keep the broader economy expanding.
Compared with a year earlier, pending home sales were down 22 percent. Purchases declined in all four regions of the country, led by a slide of 9.5 percent in the South. The smallest drop was in the West, which notched a fall of 2.7 percent.
Rates Up
So far, the Fed's half-point rate cut on Sept. 18 has failed to lower mortgage rates and boost demand. Average 30- year, fixed-rate mortgage rates ended last week at 6.42 percent, compared with an average 6.3 percent the prior week, according to Freddie Mac.
Buyers have been further constrained by the tighter lending standards and the shutdown of mortgage lenders such as American Home Mortgage Investment Corp. in early August that closed off access to credit.
``Fewer contracts were being written because of mortgage- availability issues,'' said Lawrence Yun, a senior economist at the real estate agents group. ``More than 10 percent of sales contracts fell through at the last moment in August, primarily the result of canceled loan commitments'' from lenders.
A Bloomberg survey of 30 economists forecast the index would decline 2.1 percent from July. Projections ranged from a decline of 4.7 percent to a gain of 3.4 percent.
The yield on the benchmark 10-year note dropped to 4.52 percent at 4:36 p.m. in New York, from about 4.55 percent after the report. The dollar pared its advance against the euro in the minutes after the figures were released, before resuming its rally.
Builder Stocks Rise
Homebuilders stocks rose for a second day after Citigroup Inc. said the industry's decline has made equities attractive and investors speculated the slump was overdone. The Standard & Poor's composite index of 15 leading home builders was up 19.7 points, or 5.7 percent, at 368.11 at 12:45 p.m. New York time.
``There is still no bottom in sight,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. ``Sales will continue to fall until there is a greater price capitulation by sellers. It still appears that we have not reached market-clearing prices to reduce the inventories of unsold existing homes.''
Other housing market indicators have pointed to a second leg down after concerns over subprime mortgage defaults caused credit markets to seize up in mid August.
Five-Year Low
Sales of previously owned homes fell in August to the lowest level in five years, the Realtors group reported Sept. 25. Two days later, the Commerce Department said new-home sales declined to a seven-year low and median prices dropped by the most since 1970.
The stock of unsold homes rose to a record of 5.1 million in August, forcing builders to further scale back projects. Housing will continue to hinder the expansion after already reducing growth for the last six quarters, economists say.
As stockpiles climbed and sales fell, home prices in 20 U.S. metropolitan areas dropped 3.9 percent in the 12 months through July, according to the S&P/Case-Shiller index. The decline was the biggest since record keeping began in 2001. Lower home values threaten to hurt consumer spending by preventing owners from tapping equity for extra cash.
Mounting foreclosures are adding to the problem. The number of Americans who may lose their homes to foreclosure more than doubled in August from a year earlier, according to a Sept. 18 report by Irvine, California-based RealtyTrac Inc.
`Significant Deterioration'
``During the third quarter of 2007, there was a significant deterioration in market conditions,'' Jeffrey Mezger, chief executive officer at Los Angeles-based homebuilder KB Home said Sept. 27 on a conference call after the company reported a third-quarter loss. ``At this time, we are not seeing any indication'' that the market will improve quickly.
Fed funds futures contracts indicate the central bank will probably cut the benchmark rate by 25 basis points at the October policy meeting and again in December.
Fed policy makers, in announcing the half percentage-point cut in the benchmark rate to 4.75 percent on Sept. 18, pledged to ``act as needed'' to promote stable inflation and economic growth.
To contact the reporter on this story: Bob Willis in Washington at [email protected]
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