Dec. 9 (Bloomberg) -- Fewer Americans signed contracts to buy previously owned homes in October as credit markets seized up, signaling the housing slump will extend into a fourth year.

The index of pending home resales fell 0.7 percent to 88.9 from a revised 89.5 in September, according to a report from the National Association of Realtors today in Washington. While the decline was less than forecast, sales may keep dropping because banks remain reluctant to lend, economists said.

Next year “will still be a very tough year for housing,” said Adam York, economist at Wachovia Corp. in Charlotte, North Carolina. “So much of the activity is distressed sales that it’s tough to say whether there is underlying support for the market.”

House prices, which have fallen more than a fifth so far, may drop by another 15 percent, and the danger is the decline will be “worse than that,” said Martin Feldstein, a Harvard University economics professor. The market’s continued slide threatens to spur more foreclosures, a crisis that President- elect Barack Obama plans to address after taking office Jan. 20.

A separate industry report showed that purchasing managers at U.S. companies forecast employment and investment will drop in 2009 as the recession extends into a second year.

Manufacturers project employment will decline 2.7 percent in 2009, while service companies expect a 1.3 percent decrease in payrolls, the Tempe, Arizona-based Institute for Supply Management said in a semiannual survey. Spending on new equipment will probably drop even more, the group said.

No Optimism

“Manufacturing purchasing and supply executives lack their usual optimism about their organizations’ prospects as they consider the first half of 2009,” Norbert Ore, chairman of the ISM’s manufacturing survey, said in a statement.

Today’s home-sales report showed that gains in the South and Northeast offset weakness in the West and Midwest.

Economists expected pending sales to fall 3 percent after an originally reported drop of 4.6 percent in the prior month, according to the median forecast of 35 economists in a Bloomberg News survey. Estimates ranged from a gain of 2.5 percent to a 7 percent drop.

The Realtors group, whose pending sales data go back to January 2001, started publishing the index in March 2005. The gauge was down 1 percent from October 2007.

Obama pledged last week to “start helping homeowners in a serious way” to stem foreclosures. Democratic lawmakers are also urging Treasury Secretary Henry Paulson to use the second half of the $700 billion financial-rescue fund for aiding the mortgage industry.

Regional Sales

Pending resales jumped 7.8 percent in the South and climbed 0.6 percent in the Northeast. They slumped 8.7 percent in the West and 4.3 percent in the Midwest. Demand for housing remains “uneven” across the country, with some markets in Florida, California and the Las Vegas region showing “healthy gains” from the same time last year, the report said.

Government efforts to unclog credit have shown signs of paying off. On Nov. 25, the Fed pledged to buy $600 billion of debt of Fannie Mae and Freddie Mac, the world’s two largest mortgage buyers, and Federal Home Loan Banks to ease borrowing. The next day, mortgage rates dropped by the most in at least seven years, raising hopes the plan will prevail where seven cuts in the central bank’s benchmark rate had failed.

The Standard & Poor’s 500 Supercomposite Homebuilding Index has risen the past five days, the longest winning streak since January. The gauge erased earlier losses immediately after the pending sales report, to be little changed at 233 at 10:08 a.m. in New York. The S&P 500 index was down 0.8 percent at 902.07.

Leading Indicator

Pending resales are considered a leading indicator because they track contract signings. Closings, which typically occur a month or two later, are tallied in the Realtors’ existing-home sales report due Dec. 23.

Purchases of previously owned homes, which account for about 90 percent of the market, fell in October and prices plunged by the most on record. October sales of new homes, which account for the remainder, dropped to the lowest level in 17 years.

One in 10 Americans fell behind on mortgage payments or were in foreclosure in the third quarter, the Mortgage Bankers Association reported last week. The share of mortgages 30 days or more overdue and the share of loans already in foreclosure both jumped to all-time highs in a survey that goes back 29 years, the association said.

With the economy gripped by a recession, house prices have fallen by about a fifth from their peaks in mid-2006, according to the S&P/Case-Shiller home price index.

Real-estate businesses are struggling. LandAmerica Financial Group Inc., the third-largest U.S. title insurer, filed for bankruptcy last month after facing four straight quarterly losses due to the decline in housing sales.

A “brutal real estate, credit and capital market environment” led to the move, Theodore L. Chandler Jr., chairman and chief executive officer, said in a statement.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net.

Last Updated: December 9, 2008 13:38 EST