Home sales: Worst drop in 18 years

NEW YORK (CNNMoney.com) -- Home sales posted their sharpest drop in 18 years in March, a real estate group said Tuesday, as problems in the subprime mortgage sector pushed sales well below what economists had forecast.

Sales of existing homes fell 8.4 percent to an annual rate of 6.12 million in March from February's 6.68 million rate, the National Association of Realtors said. It was the biggest one-month drop since January 1989. Economists surveyed by Briefing.com had forecast sales would fall to an annual rate of 6.45 million in March.

Home sales and prices both fell in March, according to the National Association of Realtors report.

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David Lereah, the Realtors' chief economist, said that bad weather earlier in the year may have cut down on sales that closed in March. But he acknowledged a hit from tighter lending standards in the subprime mortgage sector, which most likely made it more difficult for buyers without topflight credit to get financing to buy a home.

"We may be seeing some losses as a result of the subprime fallout," he said in a statement. "It's too early to measure a significant impact from tighter lending standards, which should moderately dampen activity."

Still, Lereah said low mortgage rates and reduced prices from sellers wary of the soft market should help sales to gradually improve during the second half of this year. He said weak sales are "masking improved fundamentals in the housing market."

But Phillip Neuhart, an economist with Wachovia, said it's clear that potential home buyers are being spooked by the continued bad news about home sales and prices, as well as problems in subprime mortgages.

He pointed out that housing worries were one of the factors in the drop in the Conference Board's consumer confidence index, also released Tuesday.

"It's a headwind to their confidence, even if it's not yet a headwind to their pocket book," he said. "Even if they're not trying to sell their house or getting hammered with problems with a subprime mortgage, consumers can't ignore the headlines."

Neuhart pointed out that the Conference Board's question asking if consumers intend to buy a home in the next six months, found only 2.7 saying they are looking to buy in the April survey, which is down more than 20 percent from the 3.4 percent who were looking to buy only two months earlier.

"It's a market a lot of consumers are frightened to enter," he said. And he said reports from home builders of a weak start to the spring home selling season suggest that the pace of sales will continue to fall through at least mid-year.

There were sharp drops in sales in every region of the country last month as the annual sales pace slowed to the weakest level since June 2003, before the record sale and building boom that began that year.

The weakness in sales came despite the continued slide in home prices, which had been helping to lift sales in some previous reports. The median home price slipped 0.3 percent to $217,000 from a year earlier, the group said. It was the eighth straight month that measure has fallen and the ninth decline in the last 10 months.

Before the current housing price slump, it had been 11 years since the group had reported a year-over-year decline in median prices. Half of homes sell for more and half sell for less.

Earlier this month the trade group projected that 2007 would be the first year to show a decline in the nearly 40 years that it has tracked prices. And the weakness in home prices, coupled with recent gains in the stock market, is making people less eager to buy into the market that had once been seen as a much safer investment.

"It's just not nearly as tempting a market to buy a home," said Neuhart.

Since the housing boom went bust last year, sales and prices have gotten hammered by a glut of homes on the market. While home inventories shrank 1.6 percent last month from February and are now down about 3 percent from the record highs hit last July, they're still up 17 percent from a year ago.

Even with that recent dip, the weaker sales mean that it would still take 7.3 months to work off the supply of houses on the market, up from 6.8 months in February. A year ago there was only a 5.6 month supply of homes available for sale.

The reading does not include new home sales, which will be reported by the Census Bureau on Wednesday. That sector has also been battered by the glut of homes on the market and the problems in subprime mortgages.

Earlier this month, No. 2 home builder D.R. Horton (Charts, Fortune 500) reported a 37 percent drop in the number of new homes it sold in the latest quarter, citing continued weakness in prices and saying the typical start to the spring home buying season hasn't begun.

While Horton is expected to still report a profit for the period, No. 3 builder Pulte Homes (Charts, Fortune 500) reported a loss in its latest quarter as did No. 4 Centex (Charts, Fortune 500) and New Jersey-based Hovnanian Enterprises (Charts, Fortune 500).

No. 1 home builder Lennar (Charts, Fortune 500) and No. 5 KB Home (Charts, Fortune 500) both reported losses in their quarters ending in November, although both returned to an operating profit in the next quarter. The CEO of KB Home said earlier this month that he expects the housing slump to get worse.