U.S. stock market frets over fragility of housing market

Looming expiration of tax credit for new home buyers another concern

By Kate Gibson, MarketWatch

The U.S. stock market's underlying worry about the state of the troubled housing industry took hold Thursday, with equities tumbling on an unexpected drop in the sale of existing homes last month.

The National Association of Realtors reported home resales fell 2.7% in August after four consecutive months of gains.

Investors had expected Thursday's report to illustrate the gradual improvement recently seen in residential real estate, looking for signs that the brighter picture was "not just driven by incentives given to first-time home buyers," said Art Hogan, chief market strategist at Jefferies & Co.

"We have to cross the bridge from an economy growing from government stimulus to an economy that is self-sustaining. If investors have one concern, that's it," Hogan said.

The $8,000 government subsidy for new home buyers expires Nov. 30.

The coming expiration of the tax credit was expected to bring some weakening in sales, as the incentive likely "pulled a portion of existing home sales forward into the summer months," Omar Sharif, an analyst at RBS Securities Inc., wrote in a research note.

"While we still hold to that idea, it is not clear if the August drop reflects that dynamic or simply a modest pullback following the largest percentage gain in resales since at least 1999," he added.

On Wall Street, energy shares led the losses as the major stock indexes erased early gains in the wake of the disappointing housing data.

The Dow Jones Industrial Average ($INDU) slipped 45.80 points, or 0.5%, to 9,702.75. The S&P 500 Index ($SPX) dropped 9.77 points, or 0.9%, to 1,051.1. The Nasdaq Composite (COMP) declined 26.27 points, or 1.2%, to 2,105.15.

On Friday, the economic data will include another report on housing, with new home sales expected to climb about 2% to a seasonally adjusted annual rate of 433,000 in August, which would mark the fifth straight increase and the highest level in a year.

Kate Gibson is a reporter for MarketWatch, based in New York.