Pending home sales fell 6.5 pct in August

By Patrick Rucker

WASHINGTON (Reuters) - Pending sales of previously owned homes fell a surprising 6.5 percent in August as buyers struggled to get loans, indicating the dire housing market could worsen, according to an industry report released on Tuesday.

The National Association of Realtors Pending Home Sales Index fell to a reading of 85.5, the lowest since records began being kept in January 2001.

The previous low for the index of a month's signed contracts was 89.8 in September 2001, in wake of the attacks on New York and Washington.

Two separate reports released on Tuesday indicated that retail sales remained soft in September.

The decline in the homes sales index was sharper than the 2.1 percent decline economists were expecting for August and comes after existing home sales for the month dipped to their lowest level in five years.

"The July number was revised up a bit, to a decline of 10.7 percent, but this is still absolutely awful, confirming that the existing homes market is now in free fall," noted Ian Shepherdson, the chief economist at High Frequency Economics. "There is no sign that the bottom of the market is near. With price declines accelerating, real mortgage rates are very high; the downside from here is still substantial."

Notably, more than 10 percent of sales contracts fell through late in the process, largely due to borrower trouble securing credit, according to an National Association of Realtors (NAR) survey.

"The impact was greater in high-cost markets that are more dependent on jumbo mortgages. In some areas, as much as 30 percent of signed contracts were falling through in August when the credit crunch problem peaked," Lawrence Yun, NAR senior economist, said in a statement.

Jumbo loans are those valued above $417,000 and are too large to be purchased by government-sponsored enterprises Fannie Mae and Freddie Mac.

The dollar rose from record lows against the euro. U.S. Treasury prices also rose on the day as the dismal housing data bolstered bond investors' hopes for a Federal Reserve interest rate cut at month-end.

Wall Street stocks were broadly down for the day while the Dow Jones home builder index .DJUSHB was up 5.5 percent, partly on the view that housing cannot get much worse. Financial services stocks, too, were up on the expectation that the worst of recent mortgage investment woes might have passed.

"The anticipation is that we are at or near the bottom of the (housing) market and the only place to go is up," said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois.

The pending sales index was 21.5 percent below the August 2006 level of 108.9.

"In general, the market is pretty well aware of the housing recession, and so the immediate impact of these kind of numbers is going to become less pronounced going forward," said Dustin Reid, foreign exchange strategist at ABN AMRO in Chicago.

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