Billerica Condominiums

Sales of existing homes in July were weaker than expected and U.S. Treasury securities rallied on the news. Traders bought on the premise that a slowdown in housing would cause a downshift in the economy, which could keep the Fed from making more aggressive rate hikes. Treasuries may also have taken heart from a recent gas-price-impact survey that revealed that 58 percent of the respondents said they were reducing discretionary spending due to higher gas prices. A decline in consumer spending is a plus for Treasuries, as it is responsible for two-thirds of economic activity. Buyers saw Treasury prices leap and yields, which move in the opposite direction of prices, fall to their lowest levels in a month. Although the yield on the benchmark 10-year note fell below 4.20 for the first time in August, mortgage lenders who base their rates on yields edged them down just slightly.

According to the National Association of Realtors, Existing Home Sales (EHS) fell 2.6 percent to an annual rate of 7.16 million units. Although this is the third highest level in history, it was below estimates for 7.25 million units, and far shy of record-breaking June sales that totaled an annual rate of 7.33 million units. In addition, inventories grew in July while house price appreciation registered a small decline.

In a separate survey, the International Council of Shopping Centers found that sales at chain stores across the country fell for the third consecutive week. Sales were off 0.2 percent for the week ended August 13 and down 0.3 percent the previous week.

Homes Sales Sink Stocks

Disappointing EHS weighed on stocks, as investors measured the impact of flagging sales on a number of industries. Big names in homebuilding - Lennar, Centex, Pulte, KB Home and DR Horton - were only a few in the sector to suffer a loss. Others affected included home improvement retailers, the construction industry and countless companies that provide home furnishings. Today news from Williams Sonoma, La-Z-Boy and Pier 1 was all disappointing.

Oil prices behaved themselves on Tuesday, rising only 6 cents, but the Dow Jones Industrials traded down from the time EHS were announced until the closing bell, although they were off their lows of the session. Only seven components ended in positive territory and none registered big gains. In fact, SBC led with a gain of only 0.7 percent. GE closed flat and 22 landed in the red. Losses, however, were not huge, with only Alcoa taking a 2.4 percent hit. Six other fell more than 1 percent.

The Nasdaq was a bit more volatile, but it too closed in negative territory. Only two of the tech bellwethers registered small gains - Cisco Systems and Oracle. Dell fell 1.5 percent, the biggest of the bellwether losses, and JDS Uniphase and Intel each shed 1.3 percent. Intel shares slid in spite of the company's announcement that it would introduce three dual-core chips early next year.

At closing: The Dow 30 Industrial Index fell 50.31 points or 0.48 percent to 10,519.58; the Nasdaq Composite index was down 4.16 points or 0.19 percent at 2,137.25, and the benchmark Standard & Poor's 500 Index slid 4.14 points or 0.34 percent to close at 1,217.59.

The 30-year Treasury bond was up 8/32 in price with the yield falling to 4.40 percent versus 4.41 percent at Monday's close.

The 10-year Treasury note was up 1/32 in price with the yield falling to 4.17 percent versus 4.21 percent at Monday's close.

The 5-year Treasury note was up 5/32 in price with the yield falling to 4.03 percent versus 4.08 percent at Monday's close.

AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage was at 5.636 percent from 5.652 percent at Monday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 5.255 percent from 5.294 percent at Monday's close.

Coming Up

Durable Goods Orders and New Home Sales for July are slated for release on Wednesday. The report on durables, big-ticket items meant to last more than three years, will have the bigger impact, as they reflect willingness of both businesses and consumers to buy more costly items. Analysts are expecting durables to fall 3.5 percent, which would be a bond-friendly reverse from the 1.9 percent increase in June. New home sales, which make up a much smaller portion of single-family home sales (about 15 percent), also are due. Analysts are forecasting annualized sales of 1.34 million units - down slightly from the 1.37 million reported for June.

If sales in both categories come in weaker than expected, this could spur more buying in Treasuries, which might allow lenders to edge mortgage rates down on some products.

Carolyn Siegel

carolyn@interest.com

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