Existing home sales rise 3.9 percent

Sales of existing homes rose in February by the largest amount in nearly three years, but worsening troubles in subprime mortgages were viewed as a roadblock to a full-fledged rebound. The National Association of Realtors reported Friday that existing home sales climbed 3.9 percent last month, pushed up by a milder-than-normal winter that boosted sales in areas of the country such as the Northeast.

It was the biggest one-month gain since March 2004 and left sales at an annual rate of 6.69 million units, a pace that was still 3.6 percent below a year ago.

On Wall Street, the Dow Jones industrial average rose by 19.87 points to close at 12,481.01 as investors were encouraged by the better-than-expected showing on home sales.

Even with the improvement in sales, the median price of a home kept falling, dropping to $212,800 in February, down 1.3 percent from a year earlier. It marked a record seventh straight decline in prices compared with the same month a year earlier.

The price weakness was a far cry from the double-digit price increases recorded during housing's boom years.

After five years in which sales set new records, sales of existing homes dropped by 8.5 percent last year, the biggest annual decline in 17 years.

Many economists believe housing sales will fall again this year as the housing industry continues to work through an adjustment following a boom fueled by the lowest mortgage rates in four decades and speculative frenzy as investors rushed to cash in on soaring real estate prices.

Economists are now concerned that rising defaults in subprime mortgages, those offered to borrowers with weak credit, will trigger tighter lending standards that will make it harder for new buyers to qualify for loans. As borrowers default on their mortgages, more properties will be dumped onto an already glutted market.

"The subprime mortgage market has taken a beating because of an unexpected surge in defaults," said Patrick Newport, an economist at Global Insight. He predicted home prices will fall in 2007, which would be the first decline on an annual basis on record.

By region of the country, existing home sales were up 14.2 percent in the Northeast, a gain attributed in large part to warmer-than-normal weather.

Sales also were up in the Midwest, a gain of 3.9 percent, and 1.6 percent in the South. Sales were unchanged in the West, which analysts blamed in part on a reluctance by sellers there to cut prices to attract buyers.

KB Home, one of the nation's largest home builders, reported Thursday that its profits for the first quarter had plunged and it warned of continuing pressure on profits for the rest of the year because of such factors as near-record levels of unsold homes and lenders tightening standards.

The Realtors' report said the inventory of unsold homes rose to 3.75 million units, up by 5.9 percent from the January level.

Senate Banking Committee members at a hearing on Thursday criticized the
Federal Reserve for not doing more to regulate risky lending practices during the housing boom. Roger Cole, the Fed's director of banking supervision, testified that "given what we know now, yes, we could have done more sooner."

The troubles with subprime lending companies helped to trigger a 416-point drop in the Dow Jones industrial average on Feb. 27 as financial markets worried that housing problems could become severe enough to push the country into a recession.

This week, the Federal Reserve triggered an upturn on Wall Street by signaling that it would consider cutting interest rates if necessary to rescue a faltering economy.

Newport said he believed housing would trim about 1.1 percentage points from overall economic growth this year, a slightly bigger impact than Global Insight had been forecasting a month ago.

David Lereah, the Realtors chief economist, said demand for homes could be cut by 150,000 to 200,000 annually over this year and 2008 because of the lending troubles.

"Our view is that the tightening in the subprime market will have a negative impact on home sales," Lereah said. "It probably won't postpone the recovery (in housing) but it will slow it."

Even with subprime market problems, Lereah said he believed the upturn in sales will be sustainable and the data will show that housing hit bottom in September last year and is now in a period of rebounding.