Sales of existing homes plunge

Sales of existing homes plummeted 27.2 percent to a 15-year low last month despite record-low mortgage rates, shocking markets and heightening worries that housing’s steep slide will drag the rest of the economy back into recession.

An unexpectedly bleak report from the National Association of Realtors showed big drops in home sales in every region to an annual rate of 3.83 million as buyers forsook the market after the completion of home purchases spawned by a temporary $8,000 federal tax credit for first-time buyers.

The news sent the Dow Jones industrial average down by as much as 183 points to below 10,000 as it fueled fears among investors of a double-dip recession. The blue-chip index ended down 134 points at 10,040 — a seven-week low.

“Truly gut-wrenching,” was how Jennifer Lee, an economist at BMO Capital Markets, described the home-sales plunge. Economists generally expected a smaller decline in light of the record-low 4.56 percent average rate for 30-year mortgages recorded during the month.

With no further federal incentives, Ms. Lee said, the floundering housing market will not be able to stage a recovery unless the pace of job and income growth picks up considerably from anemic levels.

“Mortgage rates at record lows are not enough to entice potential buyers,” she said. “Without a job, without steady income, mortgage payments cannot be made, no matter how low the rate. And that’s the bottom line.”

Nigel Gault, an economist at IHS Global Insight, said the big drop in home sales mostly reflected “payback” from an increase in sales earlier this year spurred by the tax credit. Nearly 40 percent of sales last month went to first-time buyers taking advantage of the credit under an extension of time granted by Congress.

“The most worrying feature of the recent housing data is the absence of evidence of any underlying improvement in sales,” he said. “All of the action earlier this year appears to have been driven by the tax credit.”

But Mr. Gault remained hopeful that the market eventually will resume its upward climb.

“The underlying path of housing sales is not as disastrous as July’s number suggests,” he said. “Sales are now undershooting their trend — violently.”

Lawrence Yun, an economist at the National Association of Realtors, also was optimistic that the market will regain its composure, arguing that buyers will not be able to resist for much longer the “rock-bottom” interest rates and home prices that have made houses easily affordable for people who have good credit and qualify for loans.

After plunging by nearly one-third since 2006, the nation’s median house price ticked up by 0.7 percent to $182,600 in the last year, according to the Realtors group. Mr. Yun said he expects the median price to stay in that range for some time to come.

Other economists worry, however, that home prices are headed for another downturn — a development that would be particularly destructive for the economy since it would further impair the confidence and spending power of the majority of Americans whose homes are their primary source of wealth.

About one in four homeowners owe more on their mortgages than their homes are worth, making it difficult or impossible for them to move, sell their homes or refinance. Many of those homeowners have stopped paying their loans, and as many as 6 million could lose their homes to foreclosure in the next two years.

Foreclosures reduce the sales price of a home by an average of 27 percent, which hurts the broader housing market. They also have been a major cause of instability and insolvency among banks that hold the loans.

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