Existing Home Sales Drop for Sixth Month in August to Slowest Pace Since 2002

Sales of existing homes, depressed by turmoil in credit markets, fell for a sixth straight month in August, pushing activity to the lowest point in five years.

The National Association of Realtors said that sales of existing single-family homes dropped by 4.3 percent in August, compared to July. Sales at a seasonally adjusted annual rate dropped to 5.5 million units, the slowest pace since August 2002.

The housing market has been battered by the steepest downturn in 16 years. Those problems were exacerbated in August by turmoil in credit markets, reflecting new worries about rising defaults in subprime mortgages.

The median price of an existing home — the point where half sold for more and half for less — edged up slightly in August to $224,500, an increase of 0.2 percent from August 2006. It marked the first year-over-year price increase after a record 12 straight months of declining prices.

However, many analysts believe that sales and prices will fall further as the housing market receives additional blows from rising default rates that are dumping more homes on an already glutted market and causing lenders to tighten standards. These factors have made it harder for potential borrowers to qualify for loans.

A separate report on housing prices done by Case-Shiller showed home prices fell by 3.9 percent in July in its 20-city index. Economists said that decline was probably a better reflection of where the market is right now.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, predicted “worse to come thanks to tighter credit conditions.”

The Federal Reserve responded last week to fears that all the problems in housing and credit markets could cause a recession by cutting a key interest rate by a bigger-than-expected half point.

Many economists believe that if the Fed continues to cut rates for the rest of the year that should be enough to keep the country out of a recession.

Sales were down in all parts of the country in August. The West saw the biggest drop, a decline of 9.8 percent, followed by declines of 5.2 percent in the Midwest, 2.7 percent in the South and 2 percent in the Northeast.

The fall in sales pushed the inventory of unsold homes to a record 4.58 million in August. That means it would take 10 months to exhaust the inventory of homes on the market at the August sales pace, also a record figure.

Analysts said that the credit crunch in August, which sent stock prices plunging around the globe, had a significant impact on the availability and interest rate levels for so-called jumbo mortgages, loans above $417,000.

“The unusual disruptions in the mortgage market, including a significant rise in jumbo loan rates, resulted in a fairly high number of postponed or cancelled sales, with many buyers having to search for other financing when loan commitments fell through,” said Lawrence Yun, senior economist for the Realtors.

“Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize,” Yun said.

However, other private economists are forecasting that sales of both existing and new homes will not stabilize until mid-2008 because they believe it will take that long for prices to fall far enough to reduce the large number of unsold homes.

AP

The U.S. commercial paper market shrank for a sixth week, extending the biggest slump in at least seven years and signaling Federal Reserve interest-rate cuts haven’t yet drawn investors back to short-term debt.Short-term debt maturing in 270 days or less fell $48.1 billion in the week ended yesterday to a seasonally adjusted $1.87 trillion, including a $32.1 billion decline in financial firms’ commercial paper. Asset-backed debt dropped $15.6 billion, according to the Fed in Washington.

Commercial paper investments have declined $354.5 billion, or almost 16 percent, since the week ended Aug. 8, according to the Fed. The slump began in asset-backed paper and spilled into financial companies’ short-term debt. Banks and other financial institutions have sold almost $14 billion of bonds and notes since Aug. 24, allowing them to pay off commercial paper.

“There are other funding sources that corporations are able to turn to besides commercial paper,” said Alex Roever, short- term debt strategist at JPMorgan Chase & Co. in New York. “That’s a healthy sign for the overall financial system.”

The prospect of a slowing economy, which prompted the Fed to act this week, may have caused firms to reduce sales, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.

`Supply Issue’

“The economy is not very strong,” Crescenzi said. That reduces the need for banks and brokerage firms to sell new debt to fund their day-to-day activities, he said. “The demand for money weakens when the economy weakens.”

The slide in financial sales extended a drop of $2.7 billion a week earlier.

The Fed lowered its benchmark federal funds rate to 4.75 percent and reduced its discount rate, which it charges to lend to banks, a second time to prevent a housing slump from forcing the economy into recession.

The interest-rate cut helped bring down yields on commercial paper. AA financial commercial paper 30-day yields fell to 4.72 percent yesterday, down from 5.42 percent on Sept. 5.

Financial issuers are selling longer-term debt and avoiding the risk that commercial paper won’t roll over when it matures, said James Cusser, who manages about $1.5 billion in fixed-income securities at Waddell & Reed Inc. in Shawnee Mission, Kansas.

`Until Clouds Pall’

“Financial companies may be willing to forgo all the advantages of commercial paper as long as the market is stable because they haven’t seen a liquidity event like this before,” Cusser said. The banks and brokerage may keep paying off commercial paper “until the clouds pass.”

The buyers’ freeze shut out borrowers including mortgage lenders Countrywide Financial Corp. and Thornburg Mortgage Inc. as well as GMAC LLC and investment company Cheyne Finance Plc.

GMAC, the lender owned by Cerberus Capital Management LP and General Motors Corp., last week accepted $21.4 billion in financing from Citigroup Inc. after being unable to sell commercial paper. Calabasas, California-based Countrywide borrowed its entire $11.5 billion in available bank credit lines last month to fund its operations after being unable to roll over its short-term debt.

“It’s more of a supply issue than demand,” said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts- based publisher of the Money Fund Intelligence Newsletter. “People would buy it, but issuers don’t want to issue at the price.”

Defaults Rise

Asset-backed commercial paper sellers use the cash to buy mortgages, bonds, credit card and trade receivables, as well as car loans. Because some of the programs are backed by subprime loans, where defaults had reached a five-year high, investors refused to buy the debt.

The view that purchasers of asset-backed commercial paper have driven the drop by boycotting the paper completely is a “myth that needs to be dispelled,” Maureen Coen, global head of asset-backed commercial paper origination at Credit Suisse Group, said at conference in New York yesterday.

“We all could have predicted exactly the dollar amount of decline frankly,” she said, because it was driven by exits by issuers that were forced due to program rules such as declines in the values of holdings, or that were voluntary because borrowing costs were higher in the market versus other sources of short- term debt.

Outstanding asset-backed commercial paper has slumped $253.4 billion. The declines slowed each week from a peak of $77.1 billion in the week ended Aug. 22. Sales have declined as investors balked at buying some commercial paper, shutting out some issuers.

“This means there are still players being escorted from the market,” Crane said.

Bloomberg

 Last Tuesday, Wall Street got exactly what it was angling for: a half-point reduction in interest rates. Now it wants to make sure rates will stay low.

This week, investors will be looking for signs that inflation is under control. If prices accelerate, the Federal Reserve may bump rates back up. The market is also hoping that readings on durable goods demand, the housing market and consumer spending power will show that the economy isn’t heading for recession.

The risk of inflation is why the Fed didn’t cut rates for four years. Last week, it finally lowered the target fed funds rate by half a percentage point “to forestall some of the adverse effects on the broader economy” of recent housing, credit and stock market turmoil, and “to promote moderate growth over time.” The Fed added, “it will continue to monitor inflation developments carefully,” however.

Tuesday’s rate cut, along with some strong corporate earnings reports, fueled a 2.9 percent rise in the Dow Jones industrial average last week, a 2.8 percent jump in the Standard & Poor’s 500 index and a 2.7 percent gain in the Nasdaq composite index.

It also sent gold prices soaring, crude oil to new record heights, and the dollar plunging. The U.S. currency reached all-time lows against the euro and is now equal to the Canadian dollar for the first time in more than 30 years. A weak dollar benefits U.S. exporters and companies who pull in revenue from overseas, but it can make imports more expensive and dollar assets, like U.S. Treasurys, less attractive to foreign investors.

There hasn’t been any evidence yet of import inflation, said Jeff Kleintop, chief market strategist at LPL Financial Services in Boston. He noted that many exporters to the United States reduce prices to make up for the dollar’s fall. But inflation could accelerate, which would prevent the Fed from lowering rates further or even prompt a hike.

The personal consumption expenditures deflator is released in the Labor Department’s Friday report on personal spending. The core PCE, which eliminates volatile food and energy prices, is anticipated to show a year-over-year rise of 1.9 percent, according to the median estimate of economists surveyed by Thomson Financial.

“If we get a PCE that’s higher than that, it may suggest the Fed acted too aggressively,” Kleintop said. The Fed’s comfort zone is between 1 percent and 2 percent.

Meanwhile, personal spending in August is expected to have risen by 0.3 percent after increasing by 0.5 percent. Though it’s not directly correlated, investors will try to gauge future spending patterns through consumer confidence reports from the Conference Board and the University of Michigan, on Tuesday and Friday, respectively.

Bad news on the housing front has become a given on Wall Street, but market participants will continue to monitor the industry’s failing health. On Tuesday, the National Association of Realtors reports on existing home sales and homebuilder Lennar Corp. releases its quarterly earnings. Later, on Thursday, the Commerce Department comes out with its new home sales data, and KB Home posts its earnings.

Because the market has already priced in a weaker consumer and sluggishness in the housing market, business spending “is the leg of the stool that’s most important to the economy right now,” Kleintop said.

The Commerce Department’s Wednesday report on August durable goods orders will be particularly important. Economists are anticipating a 3.1 percent decline, following a solid 5.9 percent advance in July.

The next day, the Commerce Department releases its final measure of second-quarter gross domestic product, and Friday, the Chicago purchasing managers index of September manufacturing activity in the Midwest. The Chicago PMI is seen as a precursor to next week’s September manufacturing report from the Institute for Supply Management.

Besides economic data, Wall Street will be watching out for profit warnings from companies ahead of October’s flood of third-quarter earnings. Investors are a bit nervous about how corporate America fared during August’s stock market volatility and credit tightness, but they are optimistic at this point, particularly given that international growth is a big source of income for many companies.

About 40 percent of earnings in the S&P 500 come from overseas, Kleintop said. “A lot of people think, as goes the economy, as goes the U.S. consumer, so goes corporate earnings. That’s not necessarily so.”

AP

A big overhang of property will bring U.S. house prices down further, but it is too early to say if the economy will plunge into recession, former Federal Reserve chief Alan Greenspan was quoted as saying on Friday.

Greenspan said in an interview with Austrian magazine Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.

“It’s a difficult situation, there is an enormous overhang on the real estate market,” Greenspan was quoted as saying. “Many buildings which just have been finished can’t be sold …”

“So far, prices have dropped only slightly. But it was enough to cause alarm around the world,” he said. “Prices are going to fall much lower yet.”

“However, it is too early to answer the question about a recession. We simply don’t know yet. It depends on how flexibly the economy can react,” he said.

Greenspan said deregulation and the introduction of market economies in the former Communist bloc after the Berlin Wall fell in 1989 had caused a global boom and a worldwide reduction of interest rates, which both helped fuel the property bubble.

“There is no doubt about the fact that low interest rates for long-term government bonds have caused the real estate bubble in the United States,” he said.

“The Federal Reserve began a series of interest rate increases in 2004. We were hoping to bring the speculative excesses in the real estate sector under control. We failed. We tried it again in 2005. Failure,” he said.

“Nobody could do anything about it, neither us nor the European Central Bank. We were powerless,” he said.

Reuters

Strained by a tight credit market, the nation’s economy should stumble along at a slower pace in coming months, but it may find help from lower interest rates and possible employment gains.

The Conference Board said Thursday its index of leading economic indicators dropped 0.6 percent in August, slightly higher than the 0.5 percent fall analysts were expecting. The drop was offset by a revised 0.7 rise in July. While the index has jumped up and down in recent months, the cumulative change over the past six months has been a 0.5 percent rise.

That’s consistent with the modest growth of the nation’s gross domestic product, which grew at around 2 percent in the second quarter, analysts said.

Also on Thursday, the Labor Department said jobless claims declined to the lowest level in seven weeks, surprising analysts who were expecting a jump in claims.

“That shows there’s firm demand for labor despite the turmoil in the marketplace. That’s good news,” said Gary Bigg, associate economist with Bank of America.

Taken together, Bigg said the data indicated the economy will continue its slow but steady growth.

The Conference Board report, taken before the Fed’s rate cut earlier this week, may simply reflect the immediate effects of the clampdown in credit markets in August, analysts said.

While the credit squeeze has created “significant market stress,” Federal Reserve Chairman Ben Bernanke gave fresh assurances Thursday that regulators would step in to curb the fallout. The bank cut a key interest rate by a half-point Tuesday, down to 4.75 percent. The bigger-than-expected cut was an effort to ensure the country isn’t pushed into a recession by turbulence in the financial markets.

The credit crisis started with rising defaults in subprime mortgages — home loans made to people with weak credit histories. Analysts believe these problems, along with declining consumer confidence, could lead to a recession.

The Conference Board report tracks 10 economic indicators. Only one of those indicators, real money supply, advanced in August.

The negative components, starting with the largest, were consumer expectations, unemployment claims, stock prices, building permits, vendor performance, manufacturers’ new orders for non-defense capital goods, interest rate spread, and manufacturers’ new orders for consumer goods.

Weekly manufacturing hours held steady.

The report is designed to forecast economic activity over the next three to six months.

The index rose a revised 0.7 percent in July, after slipping 0.1 percent in June. The erratic pattern reflects the ongoing uncertainty over the impact of the credit crisis on the overall economy.

“Economic growth is likely to continue in the near term, although at a slower pace,” said Ken Goldstein, labor economist for the Conference Board.

For growth to continue, however, Goldstein said there will be two potential hurdles to overcome — business confidence and the “wealth effect,” which has been hit by falling home prices.

“This loss of household assets, if combined with weak employment growth, could have a negative impact on consumer spending going forward,” Goldstein said.

Stocks dipped Thursday following weaker-than-expected earnings at Bear Stearns.

In midday trading, the Dow slipped 18.21, or 0.13 percent, to 13,797.35.

The Standard & Poor’s 500 index fell or 0.27 percent to 1,524.96 and the Nasdaq composite index fell 0.18 percent to 2,661.71.

AP