Housing grim as financial rescue debate rages

NEW YORK (Reuters) - Prices of U.S. existing homes suffered a record drop in August and the rate of sales tumbled, offering little sign of improvement in the source of the financial crisis in the United States.

The pace of existing home sales decreased 2.2 percent to an annual pace of 4.91 million units while the median national home price declined a record 9.5 percent to $203,100, the National Association of Realtors said on Wednesday.

In what would normally be a potentially bright spot, the overstock of homes for sale shrank. However, the trade group said as many as 2 in 5 home sales were by borrowers who have seen their property lose value or are facing foreclosure.

"The NAR estimates that 35-to-40 percent of all sales are of distressed property, so underlying private activity is weaker than the headlines (imply) and there is little sign of imminent improvement," Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Economists polled by Reuters were expecting home resales to fall to a 4.93 million-unit pace from the 5.00 million unit rate initially reported for July, which was revised to a 5.02 million unit pace.

The inventory of existing homes for sale fell 7.0 percent to 4.26 million from the record-high overstock reported in July.

The data came as U.S. Federal Reserve Chairman Ben Bernanke delivered a second day of testimony before Congress aimed at persuading skeptical lawmakers of the need for the government's $700 billion rescue plan for troubled financial markets.

The political wrangling over the financial-sector bailout overshadowed the day's offering of economic data.

Stocks were higher but vulnerable to uncertainties over the fate of the banking sector. U.S. government bonds, which generally benefit from signs of economic weakness, were higher on the day.

Applications for U.S. home mortgages retreated to sluggish levels last week as rising interest rates spoiled a spurt in loan refinancing, according to data published from an industry group.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity dropped 10.6 percent to 591.4 in the week ended Sept 19.

The MBA's seasonally adjusted index of refinancing applications declined 11.2 percent to 2,043.4 last week as the average 30-year mortgage rate surged 0.26 percentage point to 6.06 percent, the MBA said.

(Additional Reporting by Patrick Rucker in Washington; Ellen Freilich and Al Yoon in New York, Editing by Chizu Nomiyama)