Housing weakness spooks the market

NEW YORK » Wall Street fell for a third straight session yesterday as fresh signs of a housing slump triggered concerns that the economy is slowing too fast and could erode corporate profits.

Investors believed that housing sales might be dropping more rapidly than anticipated, and theorized that a soft landing for the U.S. economy might be more difficult to achieve. The report from the National Association of Realtors that sales of previously owned homes dropped in July to a pace of 6.33 million units, the lowest since January 2004.

The data comes after a Federal Reserve official hinted Tuesday that higher interest rates may still be needed to tame inflation, a move that could curtail consumer spending. Retailers and homebuilders, which have the most exposure to consumers, led major indexes lower.

"Housing is a relatively important number and clearly an area that has been a driver for the economy, and now we're trying to figure out if the Fed is done or if it needs to do more," said John Caldwell, chief investment strategist for McDonald Investments, the securities unit of Cleveland-based KeyCorp.

"The focus now is on housing as the market shifts away from inflation and toward growth," he said. "The question is has the Fed done too much, and is housing going to lead us down."

The Fed left interest rates unchanged earlier this month after increasing them 17 straight times over the past two years. The markets had rallied since then on hopes this would be the end of rate hikes.

The Dow Jones industrial average fell 41.94, or 0.37 percent, to 11,297.90. Combined with Monday's and Tuesday's losses, the drop erased last week's five-day rally, pushing the Dow 0.73 percent from Friday's close.

Broader stock indicators also fell. The Standard & Poor's 500 index fell 5.83, or 0.45 percent, to 1,292.99, and the Nasdaq composite index dropped 15.36, or 0.71 percent, to 2,134.66.

U.S. homebuilder stocks, already trading near yearly lows as housing sales remain depressed this summer, pulled back after the housing data was released. Toll Brothers Inc. dropped 65 cents, or 2.6 percent, to $24.55. Pulte Homes Inc., the nation's largest homebuilder fell $1.02, or 3.5 percent, to $28.09.

"We've had this fixation on the interest rate increase cycle, and now that it's moved to the middle burner, what's on the front burner is economic growth," said David Darst, chief investment strategist of the Morgan Stanley's global wealth management group. "The housing market is a barometer for prices, wealth and the consumer state of mind."