U.S. Economy: Home Sales and Consumer Confidence Drop (Update1)

April 24 (Bloomberg) -- Sales of previously owned homes fell to the lowest level in almost four years and declining prices hurt consumer confidence this month, indicating the U.S. economy is struggling to pick up following a first-quarter slowdown.

Existing home sales slid 8.4 percent in March after rising 3.7 percent the previous month, the National Association of Realtors said today in Washington. A separate private report showed home-price declines in 20 major cities accelerated in February. The Conference Board's consumer confidence index fell to 104, from 108.2.

Slowing housing and deteriorating confidence pose a risk that the economy, which is projected to have grown last quarter at the weakest pace in more than a year, won't accelerate in coming months. The dollar dropped and benchmark Treasury yields reached their lowest level this month.

``The housing downturn is now weighing increasingly heavily on the U.S. economy,'' said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania. It's ``starting to have an impact on consumers' psyche and also their spending. The second quarter is going to be no better than the first.''

The yield on the 10-year Treasury note declined as low as 4.61 percent, from 4.64 percent yesterday. The dollar fell 0.3 percent against the euro to $1.3621 and the benchmark Standard & Poor's 500 stock index lost 0.2 percent, to 1478.03 at noon in New York.

Biggest Drop

Purchases of existing homes dropped last month to an annual rate of 6.12 million, from 6.68 million in February, the biggest decline since January 1989, said David Lereah, chief economist at the National Association of Realtors. Sales fell 11.3 percent compared with a year earlier.

Federal Reserve policy makers including Chairman Ben S. Bernanke have repeatedly said this year that housing presents a risk to their outlook for ``moderate'' growth. Still, officials reiterated at last month's meeting that inflation was their bigger concern and said higher interest rates may still be needed. The Fed next meets May 9.

Resales were forecast to drop 4.3 percent last month to a 6.40 million annual rate, from February's originally reported 6.69 million, according to the median estimate in a Bloomberg News survey of 66 economists.

The decline in sales, while partly weather-related, may renew concern that the housing recession will linger. Subprime mortgage defaults are rising, and owners' reluctance to reduce prices may keep more unsold properties on the market.

`Sluggish' Sales

``The negative impact of subprime is considerable,'' Lereah said at a briefing. ``We expect sales to be sluggish in the second quarter.''

Consumer confidence declined to the lowest level in eight months in April, undercut by concerns about rising gasoline prices and the wave of mortgage defaults. The New York-based Conference Board's index dropped below last year's average of 105.9.

This year's 23 percent increase in gasoline prices is taking a bite out of Americans' wallets, and the lingering housing slump threatens to erode their wealth. Fed policy makers are counting on an expanding job market to keep consumers spending.

``High gasoline prices are starting to weigh on consumer sentiment,'' said Russell Price, senior financial economist at H&R Block Financial Advisors in Detroit. ``The added burden is bound to wear on spending habits if gas prices remain elevated through the summer.''

Unsold Homes

The supply of homes for sale decreased to 3.745 million last month. At the current sales rate, that represents a 7.3 months' supply, the highest since October. The median price of an existing home fell 0.3 percent last month from a year ago to $217,000.

Another industry report earlier today showed a measure of home values in 20 metropolitan areas, the S&P/Case-Shiller home- price index, declined 1 percent in February from a year earlier, the biggest price drop since the index started in 2001.

The Commerce Department is forecast to report April 27 that gross domestic product increased at a 1.8 percent annualized pace in the first quarter, matching the smallest gain in four years.

Monthly figures on home resales are compiled from contract closings and may reflect sales agreed upon weeks or months earlier. Unusually warm weather at the end of 2006 helped bring out more house hunters than usual, contributing to a jump in resales in the first two months of 2007. After a January gain, existing home sales rose in February by the most in three years.

Weather Effect

March resales were probably pushed lower because ``the weather was particularly disruptive'' the prior month, said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado.

New home sales, a more timely barometer because they are recorded when a contract is signed, may reflect improved weather last month. A Commerce Department report tomorrow may show new home sales rose to an annual rate of 890,000 in March from 848,000 in the prior month, according to the median forecast in a Bloomberg survey. Sales of existing homes account for about 85 percent of the U.S. housing market, and new home sales make up the rest.

Defaults by subprime borrowers, or consumers with poor or limited credit histories, will limit sales this year and put more homes back on the market, economists said.

Foreclosures surged 47 percent last month from a year ago, RealtyTrac Inc. reported last week. The failure or sale of 50 subprime mortgage companies has tightened the supply of money for lending.

Fed Forecast

Fed policy makers, who forecast the economy will expand at a moderate rate as the drag from home-construction diminishes, expect a limited impact. Subprime spillovers ``appear to have been minimal,'' Fed Governor Frederic Mishkin said last week.

``Most borrowers are not likely to face a serious credit constraint,'' Mishkin said in a speech at Bard College in Annandale-on-Hudson, New York. ``The market could be bottoming out.''

Housing starts in March rose for the second consecutive month, Commerce Department data showed. Building permits, a sign of future construction, also increased.

Homebuilders' announcements last week suggested the market remains uneven. NVR Inc., the builder of Ryan Homes, reported that first-quarter profit beat analysts' estimates as orders rose 8 percent. Pulte Homes Inc. said new orders fell 21 percent in the first quarter from a year earlier, and it will report a loss.

D.R. Horton Inc., the second-largest U.S. homebuilder, reported an 85 percent plunge in its fiscal second-quarter profit as sales dropped by more than a quarter and the company had to walk away from options to buy land.

``I don't think the market is stabilizing,'' Chief Executive Officer Donald Tomnitz said on a conference call. ``Clearly our sales are not where we wanted them to be.'' The housing markets in California, Florida and Arizona ``are becoming tougher,'' he said.