Housing Worries Could Shake Market's Foundation

Disappointing numbers, Deere restructuring weigh on investor nerves.
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Downbeat headlines from two sectors of the economy -- housing and farm equipment manufacturing -- weighed on the major stock market indices today.

The National Association of Realtors reported this morning that existing home sales fell 3% in July to an annual rate of 5.17 million units from a rate of 5.33 million in June. Economists had forecast sales for the month at an annual rate of 5.29 million.

Stocks reflected the heightened economic concerns. The

Dow Jones Industrial Average fell 40.82 points, or 0.39%, to 10,382.35, while the

Nasdaq dropped 4.4 points, or 0.23%, to 1,912.4. The

S&P 500 shed 5.72 points, or 0.48%, to 1,179.21.

Despite the faltering economy, the housing market -- with the help of a sturdy consumer -- has remained robust. Home sales have grown at a record pace this year, rising 5.2% in the month of January, for example. And even though sales fell sequentially in July, the annual rate was 7.3% above the year-ago period.

That trend is heartening to some analysts. Dave Greenlaw, the chief U.S. fixed income economist at Morgan Stanley, was unfazed by today's report. "The monthly numbers tend to bounce around quite a bit," he said. "And new-home sales have been stronger than expected." (New-home sales surged 4.9% in July.)

But, he added, "If we don't get an economic recovery by the end of the year, we might see some strains in the housing sector." Greenlaw points out that if unemployment ticks up -- and he says it could reach 5% by the end of the year -- labor market dynamics could begin to impact the housing sector.

Shares of home construction firms declined today.

Centex

(CTX)

, for example, slid 74 cents, or 1.75%, to $41.65, while

Toll Brothers

(TOL) - Get Report

fell 58 cents, or 1.58%, to $36.07.

Pulte

(PHM) - Get Report

was down 75 cents, or about 2%, to $37.34.

"As the economy has performed poorly, the saving grace has been the consumer," said Peter Boockvar, equity market strategist at Miller Tabak. "People have got to be concerned by these numbers."

The housing numbers weren't the only things worrying analysts. Shares of

Deere

(DE) - Get Report

fell 4 cents, or 0.09%, to $43.91 in trading today, after the company announced a restructuring plan.

Deere announced plans to exit its Homelite consumer-products business and restructure its construction and forestry division. It will take a pretax charge of $240 million, or $150 million after tax, in its fourth quarter.

"The farming sector has been negatively impacted for two years," said Susan Cross, an analyst at Wilmington Trust, which owns about 13,000 shares of Deere. "It's not purely an economically driven thing anymore. The company is trying to figure out what it's doing."

In exiting the consumer-products business, Deere intends to sell its factory in Chihuahua, Mexico, and shut some operations in North Carolina and South Carolina, which would affect 475 employees beyond its previously announced 8% workforce reduction.

"These actions send a clear signal that we are not content to simply wait for the economy to improve in order to make our businesses more profitable," Chief Executive Robert Lane said in a statement.

That's a good thing. Because right now, there are few signs that a recovery is taking root.