Pending Home Sales Hit Record Low in August; Stocks Mixed

By Jason Simpkins
Staff Writer

The pending home sales index fell to a record low in August, notching the lowest showing in six years, the National Association of Realtors said yesterday (Tuesday).

The index, which forecasts near-term home sales, registered 85.5. That's down from a revised 91.4 in July, according to The Associated Press.

Despite this, such U.S. homebuilders such as D.R. Horton Inc. (DRI), KB Homes (KB) and Pulte Homes Inc. (PHM) advanced for the second straight day - the sector's biggest two-day surge since August - because of a sentiment that the worst of the subprime crisis had passed. D.R. Horton rose 6.54%, KB 4.93% and Pulte 4.8%.

The reading offers a little insight into the future of the housing market, suggesting the decline hasn't bottomed out, yet. It also shows that credit requirements have tightened, which has effectively removed potential buyers from the marketplace.

This weak report should not have shocked anyone," Joel Naroff, president and chief economist at Naroff Economics, told Money Morning. "August is when the credit crunch hit and that clearly led to greater difficulty in making deals."

Although the indices were mixed, most U.S. stocks rose for a second straight day yesterday with takeovers picking up and the homebuilders leading the charge. Financial shares climbed to the highest since July after Commerce Bancorp Inc. (CBH) agreed to be bought by Canada's Toronto- Dominion Bank for $8.5 billion and Citigroup Inc. (C) said it will purchase the rest of Japanese brokerage Nikko Cordial Corp., Bloomberg News reported.

Seven stocks advanced for every five that declined on the New York Stock Exchange. The Dow Jones Industrial Average lost 40.24 pints, or 0.3%, to close at 14,047.31. The Standard & Poor's 500 Index was virtually unchanged, falling 0.41 points, and closing at 1,546.6. The Nasdaq Composite Index actually rose 6.12 points, or 0.2%, to finish the day at 2,747.11.

The future sales index demonstrated that, as defaults soared among borrowers with weak credit, many mortgage lenders were forced to drawback their loan offerings and reevaluate lending standards. As a result, buyers have in many cases struggled to secure the necessary financing, while other potential buyers and lenders were content to steer clear of the current market mess.

"Fewer contracts were being written because of mortgage availability issues," said Lawrence Yun, senior economist for the Realtors association.

The index for August is down 21.5% from a year ago. But the indicated monthly drop of 6.5% in August was significantly smaller than the 11% plunge in July.

According to Naroff, "the August pending home-sale and the realtor reports should be taken as pointing to further weakness in housing, and therefore in housing-related industries."

What's not yet clear, experts agree, is whether this represents the bottom. Even though the homebuilding stocks soared both yesterday and Monday, most analysts expect that the housing-market problems will linger well into next year.

[For a full investment analysis of the U.S. housing and financial-services sectors, please click here.]