Grim Housing Data Stifle Market Rally

Home Sales Dip to 10-Year Low in June

A days-long rally in the U.S. stock market came to an abrupt halt yesterday after the release of disappointing home sales and joblessness figures reignited worries about the economy, particularly financial services.

"It's a one-two punch," said Doug Roberts, chief investment strategist at Channel Capital Research in New Jersey. "In the past few days, we had some positive news. It was like everyone was breaking out the bubbly. This is like the hangover."

The Dow Jones industrial average took the hardest hit, dropping 283.10 points, or 2.43 percent, to close at 11,349.28. The broader Standard & Poor's 500-stock index slid 29.65 points, or 2.31 percent, to close at 1252.54. Meanwhile, the technology-driven Nasdaq composite index lost 45.77 points, or 1.97 percent, to close at 2280.11.

The market was mostly reacting to data showing that sales of previously owned single-family houses, condominiums, and cooperatives hit a 10-year low and mortgage interest rates reached their highest level in almost a year.

In June, sales of all existing homes fell 2.6 percent from May, to a seasonally adjusted annual rate of 4.86 million, according to a report by the National Association of Realtors. The drop exceeded the 1 percent slide analysts expected and wiped out gains made in May, when sales climbed 2 percent from the previous month.

Sales of single-family homes looked particularly grim, dropping 3.2 percent to a seasonally adjusted annual rate of 4.27 million -- the lowest number since January 1998.

Prices slid, too. The median home price was $215,100 in June, down 6.1 percent from $229,000 at the same time last year.

Also yesterday, the Census Bureau reported that foreclosures contributed to a record number of vacant homes in the second quarter.

Bill Gross, a well-known bond fund manager at Pacific Investment Management Co., predicted that if home prices keep slipping and foreclosures keep mounting, banks and brokerages will lose $1 trillion. "PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble," Gross wrote in a commentary on his firm's Web site.

Joseph Brusuelas, chief U.S. economist at California-based Merk Investments, said Gross's grave forecast spooked investors more and contributed to declines in shares of Citigroup, Bank of America, Goldman Sachs and Washington Mutual.

"It really did seem to take the wind out of the sails of equities," Brusuelas said. "Gross moved the market today."

Yesterday's events dashed investor confidence that had been building during the past week, when some financial companies reported better-than-expected earnings and Congress pressed forward with a legislation aimed at rescuing troubled homeowners and the mortgage giants, Fannie Mae and Freddie Mac.

The House passed that package on Wednesday and the Senate expects to do the same on Saturday. President Bush abandoned his threat to veto the legislation and plans to sign it soon.

But as the housing numbers show, the problems appear to be long-term, analysts said. Potential buyers are either waiting for prices to drop lower or struggling to find financing as lenders tighten their standards. Meanwhile, the bloated supply of homes on the market keeps growing.

"The housing numbers today are a bucket of cold water for investors," said Michael Larson, an analyst with Weiss Research in Florida. "They show that even while the government is doing what it can to help, we still have a market with too much supply and too little demand, and the problems remain very, very significant." New-home sales statistics are scheduled to be released today, and expectations are that they will be dismal, too.

A rise in interest rates is not helping the housing market. Freddie Mac reported that rates on 30-year mortgages jumped this week to 6.63 percent, up sharply from 6.26 percent last week. That was the highest level for 30-year loans since last August.

About the same time the Realtors group released its housing numbers, the government unveiled disappointing employment figures. The Labor Department said 406,000 people filed first-time claims for unemployment benefits last week, a sharp jump of 34,000 seasonally adjusted. The last time claims were higher was after Hurricane Katrina and other storms in 2005.