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Housing Still Sinking

Pending home sales data show that the mortgage mess is taking its toll.

Stop thinking the housing market can't get worse.

A report on pending home sales data from a major Realtor group Wednesday shows that the housing industry remains a mess.

The National Association of Realtors said pending home sales -- the most forward-looking of any housing data -- fell 12.2% from June to July. The index, which is based on contract signings, was down 16.1% from a year earlier.

Homebuilder stocks tumbled on the news. Although the data measure contracts for existing-home sales, the numbers are bad for homebuilders because they suggest that further price cuts will be necessary to cut down on record high inventories.

The pending home sales data "probably shouldn't be too much of surprise given the changes we've been seeing in the mortgage market, especially the Alt-A sector," says Alex Barron, an analyst with Agency Trading Group. "A lot of people were depending on those creative mortgages to be able to stretch to afford to buy into a home."

Barron was one of the earliest bearish investors on the homebuilder sector, and he continues to tell investors to avoid the stocks.

He warns that investors should not be fooled by spikes in mortgage applications data, such as the 1.3% rise for last week that the Mortgage Bankers Association reported Wednesday.

Part of the increase likely is due to prospective homebuyers filing numerous applications to mortgage lenders in hopes that one will be accepted. Mortgage lenders have sharply tightened underwriting standards over the past few months.

Barron points out that he knows a mortgage loan processor who is now submitting about four to five loan applications for buyers, compared with the one or two applications prior to the credit cycle turning.

Lawrence Yun, senior economist at the NAR, said such "abnormal factors" are contributing to the sales malaise.

"It's difficult to fully account for mortgage disruptions in the index, and our members are telling us some sales contracts aren't closing because mortgage commitments have been falling through at the last moment," Yun said in a statement.

He said these problems are primarily with jumbo loans -- or mortgages that exceed $417,000 -- and continuing issues for subprime borrowers. There are no serious problems for the majority of buyers who qualify for conventional financing or Federal Housing Administration-insured loans, Yun said.

Among stocks,

Standard Pacific


was down 5.6% to $9.93, and

Pulte Homes

(PHM) - Get Free Report

fell 3.4% to $16.37.


(HOV) - Get Free Report

, which reports earnings Thursday, fell 4.7% to $12.01.

The decline highlights how homebuilder stocks continue to be falling knives. While many pundits have been declaring the stocks to be worth buying at these levels, they remain value traps.

Investors also shouldn't view a possible

Federal Reserve

fed funds rate cut as a savior for the builders. Since 1980, the stocks have had a mixed record following an initial cut in the fed funds rate, as compared with more solid gains following an initial pause, according to a research note from JPMorgan homebuilder analyst Michael Rehaut on Wednesday.

If the Fed were to cut rates on Sept. 18 in the absence of any significant fundamental changes -- such as

Fannie Mae



Freddie Mac


being allowed to provide more liquidity to the market, or a material reduction in inventory levels -- then Rehaut said he would be inclined to maintain his "cautious near-term stance, given our view for worsening trends over the next several months."