Housing slowdown steals wind from recovery

The Commerce Department says new-home sales dropped more than 13 percent in July. Analysts blame higher mortgage rates, which have gone up more than a full percentage point. Plus, Microsoft CEO Steve Ballmer says he plans to retire within a year. Alison Harmelin reports.

(MoneyWatch) Although housing has been one of the few bright spots during the tepid recovery, new economic data suggest the sector may be losing steam.

The National Association of Realtors said Monday that the number of people who had signed a contract to buy an existing home fell 5.6 percent in September and is now at its lowest level since late 2012. Lawrence Yun, chief economist for the trade group, attributes the drop in pending home sales to an uptick in mortgage rates earlier this year, tight inventory, declining housing affordability and the hit to consumer confidence stemming from this month's government shutdown.

It is the fourth consecutive month that NAR's index of pending home sales has fallen. In another sign of softening, the group said last week that final sales of existing homes sank nearly 2 percent in September.

Borrowing costs have surged and ebbed in recent months. Mortgage rates rose sharply in May, hitting a two-year high, after Federal Reserve officials said they were preparing to scale back bond purchases aimed at lowering longer-term rates and boosting economic activity.

But rates edged down in more recent weeks as weak job growth convinced investors that the central bank was likely to maintain the pace of stimulus. The average rate on a 30-year mortgage dipped last week to 4.13 percent, down from 4.28 percent the previous week and the lowest level in four months, according to Freddie Mac.

Still, overall home loan costs have steadily crept up since last year. The rate on 30-year fixed mortgage has declined by more than 40 basis points since early September, but remains roughly 60 basis points above its level this spring.

That is raising concerns among forecasters that the uptick will dent home sales and take the wind out of the recovery. Ian Shepherdson, chief economist with Pantheon Macroeconomics, said in a research note that the latest decrease in home sales "lays to rest the notion that the housing market is strong enough to absorb the rise in mortgage rates with no ill-effects."

One reason the housing market is slowing down: Americans have seen their earnings continue to stagnate during the recovery, continuing a pattern of weak wage growth that long predates the 2008 financial crisis. Meanwhile, home prices have rebounded strongly since bottoming out after the crash. Although that benefits homeowners, helping people recover some of the wealth they lost during the crash, it is also taking the price of real estate beyond the means of many prospective buyers.

A slowdown in housing could hurt home builders and construction companies, while more broadly pinching consumer spending. That, in turn, risks keeping a lid on already weak job-creation.

There are other signs that the economy is adrift. TheFed said Monday that U.S. factory output in September rose only 0.1 percent, down from 0.5 percent the previous month. Although car sales are strong, production of electronics, appliances and many other goods remain weak.

"The entire manufacturing sector only managed to grow at a tepid 1.2 percent annual rate in the third quarter, and that performance followed virtual stagnation in the second quarter," said Michael Montgomery, U.S. economist with IHS Global Insight, in note to clients.

Most economists expect the U.S. economy to grow about 2 percent this year before gaining speed in 2014.

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    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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