New sign of US housing slowdown

Interest rate rises have stretched household budgets

Sales of existing US homes have fallen to their lowest level since the start of 2004, in a fresh sign that the once red-hot housing market is cooling down.

Sales of previously-owned homes were down 4% in July from a month before, a bigger fall than analysts had expected.

Successive interest rate rises have taken the heat out of the market, with sales of new homes also falling.

Federal Reserve chairman Ben Bernanke said recently he believed the market was headed for a "soft landing".

Budget pressures

The housing boom helped drive the US economy forward over the past few years.

But two years of interest rate rises - which have seen rates increase to 5.25% - have put growing pressure on household incomes.

The housing market is in transition and there is pain in that transition David Lereah, National Association of Realtors

A senior Fed official said on Tuesday that higher inflation was more of a risk than lower growth.

Economists interpreted the remarks as a signal that rates may yet rise further after a pause earlier this month.

The average price of homes sold last month rose 0.9% from a year ago to $230,000, according to figures from the National Association of Realtors (NAR), the smallest year-on-year increase since 1995.

New home sales fell 3% in June and experts believe sales could be down by about 10% for the year as a whole.

Adjustment

The NAR said the market was partly undergoing a correction following excessive price rises but that the softening of the economy was also affecting sales activity in parts of the country.

"What we are experiencing right now is an inventory and price adjustment," said its chief economist David Lereah.

"The housing market is in transition and there is pain in that transition."

The US economy slowed significantly in the second quarter of the year, with output rising at an annualised rate of 2.5% compared with 5.6% in the previous quarter.

The latest figures raised the question of "whether there is a soft or a hard landing of the economy", said Peter Cardillo, an equity analyst with investment brokers SW Bach.