Weakest home sales since '03 hit values

NEW YORK (CNNMoney.com) -- Homeowners trying to sell properties found the market weaker than expected in April, as the pace of sales fell to nearly a four-year low, feeding a glut on the market that continues to cut into home values.

The National Association of Realtors (NAR) said Friday in its latest reading on existing home sales that the problems in the subprime mortgage market are now cutting into sales, as they limit the availability of financing for potential buyers.

Weak home sales led to further declines in home prices in an April reading.

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The group's closely watched report showed the annual pace of existing home sales fell 2.6 percent to 5.99 million in April, down from a revised 6.15 million pace in March. It's the first time the pace of sales fell below the 6 million level since June 2003. Economists surveyed by Briefing.com had forecast a little-changed sales rate of 6.13 million.

The report follows Thursday's reading from the Census Bureau that showed a sharp increase in the sales of new homes. But that was sparked by a nearly 11 percent plunge in median price compared to a year earlier, the sharpest drop in that key price measure since 1970.

"We've been anticipating slower home sales because many subprime loan products are no longer available," Lawrence Yun, NAR senior economist, said in the existing home sales report. "In addition, increased scrutiny by lenders is stopping risky mortgage origination."

Yun said the changes in the mortgage market are positive long term. Tougher lending standards will make it less likely that buyers will get home loans they can't afford.

But those tougher standards are now cutting into sales, causing a rise in the supply of homes on the market for what is typically the start of the spring selling season.

That glut continues to slam home values. The median price of a home sold in the month was $220,900, down 0.8 percent from the $222,600 price for a typical home sale a year earlier. It marked the ninth straight month that prices showed a decline from a year earlier, a relatively rare condition that had not been seen in 11 years before the current housing slump.

The slower sales pace and a 10.4 percent increase in the inventory of homes on the market in the last month to 4.2 million means there is now an 8.4 month supply of homes for sale nationwide, up from a 7.4 month supply in March.

Bill Hampel, chief economist at Credit Union National Association, said he agrees with the assessment of Realtors that a relatively strong economy should stop a complete meltdown in the housing market. But he said home sales and prices are likely to still see some further declines, and that a recovery in sales and home values could take years.

"I don't expect a snap back in housing market for maybe five or six years, with hardly any price increases and subdued sales," he said. "A modest recovery might start in a year or two, but it'll be four years or more before any one notices."

Hampel said that home prices need to correct after a sharp run-up during the real estate boom of 2004 and 2005, when the median price of existing homes shot up 23 percent above the 2003 level.

That boom was at least partly fed by an increase in non-traditional mortgage loans, which expanded the number of potential home buyers.

The problems with rising delinquency and default rates in the subprime mortgage sector first started to come into focus in February and March, causing a number of lenders to exit the field and one of the largest, New Century, to file for bankruptcy.

The existing home sales figures are recorded at the time a sales is closed, which is typically a month or two after a sales contract is signed and a buyer arranges for financing. So the April report is among the first to show the impact of those lending problems.

"This week's home sales data illustrate the fundamental differences in how home builders and home owners are dealing with a weakening market," said Peter Schiff, president of Euro Pacific Capita. "The new home sales report shows builders acting like sober-eyed businesspeople, slashing prices to move bloated inventory."

"The existing home sales report shows homeowners clinging to their dreams of real estate windfalls," he added. "It is only a matter of time before homeowners realize that the dream is over, and that price cuts are now necessary to sell their homes."

The downturn in new home sales and home building has hammered results at the nation's largest builders, which are reporting losses and lowering financial guidance, as cancellation rates from buyers rise along with charges for walking away from land options.

Thursday, luxury home builder Toll Brothers (Charts, Fortune 500) became the latest to report a sharp drop in earnings. It had already warned it expected to miss its earlier 2007 guidance.

Pulte Homes (Charts, Fortune 500), the No. 4 U.S. homebuilder, posted a loss late last month. No. 2 homebuilder D.R. Horton (Charts, Fortune 500) reported a 37 percent drop in the number of new homes sold in the latest quarter, citing weakness in prices and saying the typical start to the spring home buying season hasn't begun.

No. 3 Centex (Charts, Fortune 500) and New Jersey-based Hovnanian Enterprises (Charts, Fortune 500) both also reported losses in the most recent quarter.

No. 5 builder KB Home (Charts, Fortune 500) returned to an operating profit in its most recent quarter after an earlier loss, but its CEO warned in April that he expects the housing slump to get worse.