Housing slump clouds US recovery prospects

Agence France Presse

Posted at Aug 25 2010 10:38 AM | Updated as of Aug 25 2010 06:49 PM

WASHINGTON  - US home sales are plunging despite rock-bottom mortgage rates as high unemployment prevents people from buying houses and threatens to curtail economy recovery.

Existing-home sales plunged for the third straight month by a whopping 27.2% in July to levels unseen in more than a decade, an industry group said Tuesday.

Sales of single-family homes, townhomes and condominiums dropped to 3.83 million units from 5.26 million units in June, said the National Association of Realtors (NAR),

The slide was more than double the 12.1%expected by most economists, with sales at the lowest level since 1999.

"The disappointing US home sales data has investors worried that the global recovery is unraveling," said Chris Lafakis, an economist at Moody's Economy.com.

Single-family home sales -- accounting for the bulk of transactions -- were at the lowest in 15 years, the association said, providing the latest statistics on the housing sector, which was at the epicenter of the financial crisis that plunged the nation into recession in December 2007.

If sales do not improve, rising inventories -- there are nearly four million unsold previously owned homes in the market -- could eat further into prices.

"The first worry is that we are not seeing much response in demand to the historic drop in mortgage rates," said Societe Generale analyst Aneta Markowska.

Thirty-year mortgage rates have fallen to a record low 4.42%  but mortgage applications for new purchases as of early August were sitting very close to cyclical lows.

"This inability to induce demand may be explained in part by poor employment prospects," Markowska said. "If businesses scale back further on hiring plans, it would be hard to imagine any material improvement in housing demand."

Unemployment at 9.5 percent is the biggest concern of President Barack Obama, whose Democratic Party faces the possibility it could lose control of Congress in mid-term elections in November.

The economy began growing since the middle of last year from recession but expansion has slowed, triggering worries of a double-dip recession.

The government is expected this week to significantly revise lower the US economic growth chalked up in the second quarter to 1.4% from 2.4%  previously, most analysts said.

"Housing and employment continue to be major problems for the US recovery," said analyst Andrew Busch of BMO Capital Markets.

The sharp July home sales decline was payback for a May expiry of a government homebuyers' tax credit incentive introduced to boost economic recovery.

"All of the action earlier this year appears to have been driven by the tax credit," said Nigel Gault, chief US economist for IHS Global Insight.

Mortgage applications for purchase have been moving sideways since June even as mortgage rates plunged.

"There's no sign of any underlying recovery despite rock-bottom interest rates," Gault said. "A sustained upturn will depend on an improvement in the jobs market, which at the moment is slowing down rather than gathering pace."

No part of the country escaped the July home sales carnage. The best performing region -- the US south -- posted a nearly 20% drop.

"It is not clear if the housing market hit a huge air pocket or crashed and burned but for now, this sector looks to be flat on its back," said chief economist Joel Naroff of Naroff Economic Advisors.