CHICAGO -- Two months after the subprime lending market's meltdown, the toll on the economy has become much more severe, with sales of existing homes showing a record decline in September.
The numbers were bad across the country in what was a dispiriting development yesterday for anxious home sellers and an ominous sign for the economy since no recovery is likely soon.
The National Association of Realtors reported that September home sales fell 8 percent from the previous month to an annual rate of 5.04 million, the fewest since records began in 1999.
The median price - the point at which half the homes sold for more and half for less - also fell nationally, down 4.2 percent, to $211,700 from the same period a year ago, the association said.
Home sales are a key sector of the economy, and many consumers are believed to have spent generously based on the once-rising value of their residences. If that spending weakens, it could hurt the nation's economic vitality.
The 8 percent decline in sales was bigger than an expected 4.5 percent drop. It was the seventh straight monthly decline and left sales activity 19.1 percent below the pace of a year ago.
The slowdown meant that the inventory of unsold homes rose to 4.4 million units in September.
At the September sales pace, it would take 10.5 months to eliminate the inventory of unsold homes, a record length of time.
"I think things are going to get worse," said Tim Rogers, chief economist for Briefing.com, which performs market and economic analysis. "We are in for more declines."
Rogers said the rising rate of mortgage foreclosures will add to the inventory of homes for sale. Lenders often sell foreclosed homes at low prices, further depressing the housing market. "Foreclosures are probably going to increase over the next half year," Rogers said.
Economists generally are not predicting a recession, as many aspects of the economy remain strong. Exports are rising, for example and the unemployment rate has, at least so far, remained at a comfortable level.
Many of the nation's banks and financial houses are struggling under the burden of subprime mortgages made to weak borrowers in recent years. Those mortgages are the most likely to default.
Yesterday, for example, Merrill Lynch & Co. Inc. said it wrote down $7.9 billion in debt it holds, including subprime mortgages.
Some analysts say it is almost a given that to preserve economic growth the Federal Reserve will cut a key interest rate at its meeting next week, and most likely reduce it further in 2008.
"The Fed is in an easing mood," said Gary Wolfer, chief economist at Univest Corp. of Pennsylvania, a diversified bank holding company. Wolfer said he expects the federal funds rate - the Fed's key rate - to drop to 3.75 from the current 4.75 in the months ahead.
While that would in general lower short-term interest rates, it is not guaranteed to help homeowners with adjustable mortgages that reset to higher interest rates in the near future. Often as mortgage payments rise, so do the number of foreclosures.
"I don't see a classical recession," Wolfer said. But he added that concerns about subprime mortgages and foreclosures will continue through mid-2008, and that will weigh on the economy in general.
While home sales are important on the national level, they can be of critical importance to individuals. Slow sales breed slow sales, as would-be buyers cannot sell their existing homes and are frozen out of the market.
Lenders have tightened standards for making mortgages, and that is squeezing some buyers with weaker credit out of the market. That's what Jason Ugent says is bedeviling his efforts to sell a $95,000 frame home in Hammond, Ind., that he fixed up and put on the market about 10 months ago. He has cut the price by $10,000 and says he'll throw in a flat-screen TV for the buyer.
Ugent, a graduate student in real estate at DePaul University in Chicago, says he has been successful at flipping houses in the past two years, but this one is wearing him down.
"Now it's definitely people's credit," he said. "With the banks tightening up, you have to have a decent credit score now. And even that isn't going to get you 100 percent financing, which it did six months ago."
Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business, sees the same phenomenon.
"Clearly, the absence of financing for homebuyers with less than stellar credit records ... is gripping the housing market and driving prices down," he said.
Robert Manor and Mary Umberger write for the Chicago Tribune. The Associated Press contributed to this article.