Sales of U.S. Existing Homes Probably Dropped to Six-Year Low

Bob Willis /Bloomberg, 24/10/2007

Sales of previously owned U.S. homes fell in September to a six-year low, signaling no letup in the real-estate slump that threatens to stall economic growth, economists said before a report today.

Purchases declined 4.5 percent to an annual rate of 5.25 million, according to the median forecast of 76 economists surveyed by Bloomberg News. Sales would be down 27 percent from the peak reached in September 2005.

The collapse in subprime lending will limit access to credit and reduce sales even more in coming months, economists said. The drop in demand suggests home prices will keep falling, raising the risk that consumer spending, which accounts for more than two-thirds of the economy, will slow.
``The velocity of the housing downturn is picking up,'' said William O'Donnell, head of U.S. rate strategy at UBS Securities LLC in New York. ``The inventory of unsold homes is piling up.''
The report from the National Association of Realtors is due at 10 a.m. in Washington. Economists' forecasts ranged from 4.95 million to 5.8 million, compared with a 5.5 million annual rate in August.

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.

Home prices in 20 U.S. metropolitan areas fell 3.9 percent in July from a year earlier, the biggest such decline since record-keeping began in 2001, according to the S&P/Case-Shiller home-price index.

Loan Volumes, Foreclosures

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.

A report from the Realtors' association on Oct. 2 already signaled sales would continue to fall. 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.

Lower Forecasts

The real-estate agents group this month reduced its sales projection for the 10th time this year. It forecast existing home sales would fall to 5.78 million, from 6.48 million in 2006. The median home price is forecast to drop 1.3 percent to $219,000.

Federal Reserve 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.

Fed funds futures trading shows the majority of investors are betting the Federal Open Market Committee will reduce the benchmark rate by a quarter percentage point on Oct. 31.
The central bank lowered the rate by half a percentage point on Sept. 18, the first cut in four years. In its statement, the Fed warned that the ``tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.''

Slower Growth

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.

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.''