Existing Home Sales Tumble a Surprising 6.6%

But the National Association of Realtors continues to project a record year for housing sales.
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Sales of existing single-family homes fell a surprising 6.6% in October, a real estate industry group reported Monday, as rising mortgage rates discouraged buyers.

But the

National Association of Realtors

continues to project a record year for housing sales.

The realtors reported that housing sales fell to a seasonally adjusted annual rate of 4.79 million units, from 5.13 million in September, putting sales at their lowest rate since January 1998, when the rate was 4.59 million. The latest decline was the fourth in four months. The October 1999 sales pace was also 3% below the level set in October 1998, at 4.94 million units.

Most economists had expected existing homes sales to be flat in the latest month.

But the realtors remain optimistic, projecting a total of nearly 5.20 million existing home sales during 1999. That would represent a more than 4% increase over last year's record total of 4.97 million units.

"Demand is strong in both the entry-level and trade-up segments of the market," said Dennis Cronk, the association's president, in a statement. "Home buyers continue to enjoy a variety of factors, such as wage growth and low inflation, that make it easier for them to afford to own a new home."

Housing activity has definitely slowed. The last increase was back in June, when the annual rate came in at 5.63 million, 12.6% higher than May.

Most economists ascribed the decline to the

Federal Reserve's

decision to raise interest rates. The Fed increased its target for the federal funds rate three times this year, raising the rate from 4 3/4% to 5 1/2%. Those moves reversed the rate reductions of the year before.

Since the beginning of the year, the average 30-year mortgage rate is up to 7.85% in October from 6.79% in January, according to the

Federal Home Loan Mortgage Corp

. Meanwhile, the average one-year adjustable-rate mortgage rate is up to 6.27% in October from 5.59% in January.

In forecasting that there would be no change in the home resale numbers, the rate increases had been taken into account. But "the magnitude of the impact was a surprise," explained Joseph Abate, an economist at

Lehman Brothers

. "This is the first time that higher interest rates have begun to have an effect on the housing market. Previously, there was no impact at all, with a strong wealth effect mitigating the effect of interest rates."

Still, it is uncertain whether the housing market will become even softer. "It's too early to call this a significant change," said David Cohen, an economist at

International Strategy & Investment

. "There are some signs that the economy is slowing, even though last week we saw some very strong revisions to the

gross domestic product

. These and the

auto sales

numbers would support that." The

Commerce Department

revised its estimate for third-quarter GDP upward to 5.5% from 4.8% And auto sales were up 2.8% in October compared with the year before.

Cohen also thinks that the association's optimism is warranted. "Housing has been very strong for awhile," he said. "It's just rolled over a touch. I wouldn't call this the end of the housing boom just yet."

The decline in the pace of housing sales ease some fear about inflation, with positive consequences for both the stock and bond markets, analysts said. "This means the bond market is moving in the right direction of slower growth and diminished chances of a rate hike," Abate said.

Cohen said he would not become concerned about the health of the housing market unless the decline in existing home sales continues for the next couple of months. "If that happened, it would be a significant move down and would imply that the sector is slowing," he said.

The Commerce Department will release its report on

new home sales

on Thursday. Last month, that figure was down almost 13%. After seeing the National Association of Realtors numbers, Cohen is leaning toward a flat reading for new home sales, rather than a slight increase. "But that's just a bounce back because of the weak number last month," he said. "Rates are a little higher now. Again, I wouldn't consider this to be the end of the housing boom."