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Pending Home Sales Slide As Credit Tightens

Pending sales of previously owned U.S. homes fell by a surprising 12.2 % in July as credit tightened up amid troubles in the housing and subprime mortgage sectors, a real estate trade group said on Wednesday.

The National Association of Realtor's Pending Home Sales Index, based on contracts signed in July, fell to a reading of 89.9, the lowest since September 2001 when the index stood at 89.8.

The fall was much bigger than the 2% decline in the index economists were expecting for July and helped paint a bleaker picture of the housing market moving forward.

"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," the Realtor's economist Lawrence Yun said. But he added that while some concerns remain, since mid-August the market appears to be stabilizing.

Yun said the bulk of the problems are with jumbo loans and subprime borrowers, but there are no serious problems for the majority of buyers qualifying for conventional financing.

Still, the bigger-than-expected decline in July led some analysts to believe the Federal Reserve would be more likely to cut interest rates when they meet later this month.

"Obviously it's not good news, and much worse than expected. It's July data that's before all of the subprime woes really hit the news service in August, so I imagine August is going to be worse," said Todd Clark, Managing Director of stock trading at Nollenberger Capital Partners in San Francisco.

"The good news is it probably forces the Fed's hands to cut rates when they meet later this month. But there's not much good news in that number, that's for sure," he added.

U.S. Treasury debt prices extended gains after release of the home sales data and stocks fell.

"People are getting more scared about the economy slowing and that's pushing bond prices up. The idea is that if the U.S. economy has already slowed, then maybe the Fed will need to cut
interest rates," said Richard Huber, economist at A.G. Edwards and Sons in St. Louis.

The Realtor's index offers a good look into home sales moving forward because these pending sales contracts are usually finalized within one or two months. Compared to a year ago, the index was 16.1 percent lower.

"It is showing the continuing decline in prospective home sales and the ongoing weakness in the housing market," said Kevin Logan, economist at Dresdner Kleinwort Wasserstein in
New York.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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