Existing home sales fall for eighth month

updated 6:06 p.m. ET Nov. 28, 2007

WASHINGTON - Hit by a severe credit crunch, existing home sales fell for the eighth straight month with median home prices dropping by a record amount.

The National Association of Realtors reported Wednesday that sales of existing homes dropped by 1.2 percent last month to a seasonally adjusted annual rate of 4.97 million units. That represented the slowest sales pace on record going back to 1999 and was 20.7 percent below activity a year ago.

The median price of a home sold last month, the point where half the homes sold for more and half for less, declined to $207,800, a drop of 5.1 percent from a year ago, the biggest year-over-year price decline on record.

The October weakness was blamed on the fallout from a serious credit crunch that roiled financial markets in August. Banks and other lenders have tightened credit standards in response to a soaring level of defaults, especially on subprime mortgages — loans provided to borrowers with weak credit histories.

Analysts predicted that prices will have to drop further in order to work down historic levels of unsold homes and the slump in housing, already the most severe in more than two decades, could last for another year.

“The light at the end of the housing meltdown tunnel appears to be an oncoming train,” Joel Naroff, an economist with Naroff Economic Advisors, said in response to the new figures. “With so many choices and so few buyers, the median price is cratering.”

Wall Street, however, took the latest bad news on housing in stride, preferring to focus instead on comments from Federal Reserve Vice Chairman Donald Kohn that were interpreted as offering the hope of further Fed rate cuts.

The Dow Jones industrial average soared by 331.01 points to close at 13,289.45, adding to a 215-point gain on Tuesday. It was the Dow’s largest two-day point gain in more than five years.

Kohn said the central bank would need to be “nimble” in setting monetary policy. He noted in a speech in New York that the recent financial market turbulence had undone some of the improvements that had been seen and increased the risk of “especially adverse outcomes” for the economy.

The worry is that the credit crisis and a deepening housing slump could be enough to push the country into a recession. In its latest outlook at business conditions around the country, the Fed said Wednesday that while the economy continued to grow in the October to mid-November period it did so at a “reduced pace.”

In another sign of spreading economic weakness, the Commerce Department reported that orders to factories for big-ticket manufactured goods declined by 0.4 percent in October. It was the third straight drop, representing the longest stretch of weakness in nearly four years.

Especially troubling was the fact that the category which represents business investment plans dropped by 2.3 percent, the biggest setback since last February. Economists had been hoping that business investment spending would cushion some of the impact from the housing slump.

With home sales falling, the inventory of unsold homes rose by 1.9 percent to 4.45 million units. Analysts said the backlog was about double what it is during normal times and would likely rise further as a rising mortgage defaults in coming months dump more homes on the already glutted market.

Patrick Newport, an economist at Global Insight, predicted that home sales could decline another 10 percent from the current depressed levels by mid-2008. He said by that time he believes home prices will have fallen sufficiently to trigger a sales rebound.

By region of the country, existing home sales were unchanged in the Northeast and the South and down by 1.7 percent in the Midwest and 4.4 percent in the West.

The big drop in the West reflected the fact that the market for so-called “jumbo mortgages,” loans higher than $417,000, tightened considerably this summer. California, with its high home prices, depends heavily on the availability of jumbo loans.

While economic growth roared ahead at a rate approaching 5 percent in the summer, many economists believe growth has slowed dramatically in the current quarter from the combined blows of the most severe housing slump in more than two decades, the credit crunch and rising energy prices.

The government will release its latest look at overall economic activity on Thursday and it is expected to show growth at an annual rate of around 4.9 percent in the July-September quarter. However, growth in the current October-December period is expected to slump to a barely discernible 1.5 percent or even less.

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