Sept. 5 (Bloomberg) -- The number of Americans entering into contracts to buy previously owned homes plunged in July by the most since records began in 2001, worsening the two-year housing recession.

The National Association of Realtors' index of signed purchase agreements dropped 12.2 percent after gaining 5 percent in June, the group said today in Washington. The decline was more than five times the median forecast of economists surveyed by Bloomberg News.

Stocks extended their retreat and Treasury notes jumped as traders speculated that economic growth, already jeopardized by the sudden increase in credit costs last month, will suffer even more after the collapse of the subprime mortgage market.

``The housing market is bad and is going to stay bad for some time,'' said Zach Pandl, an economist at Lehman Brothers Holdings Inc. in New York, who predicted a 3 percent drop. ``This number does not look good for existing home sales for August.''

The median forecast was for a decrease of 2.2 percent, according to a survey of 26 analysts. Estimates ranged from a drop of 4 percent to an increase of 1.5 percent.

In a sign the labor market is softening, ADP Employer Services projected companies in the U.S. added the fewest jobs in August since 2003. The 38,000 increase was less than forecast and followed a revised gain of 41,000 for the prior month.

Paring Labor Forecasts

The ADP figures prompted economists to cut their estimates for employment growth in advance of this week's Labor Department report. The median forecast is for job growth of 105,000 in August, compared with 108,000 before the ADP number.

The Federal Reserve found the effects of the August credit- market rout on the broader economy ``limited'' beyond the housing industry, according to its regional business survey issued today.

``Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited,'' the Fed said in the survey, which concluded before Aug. 27. ``Economic activity has continued to expand'' nationwide, the Fed said in the Beige Book report, named for the color of its cover.

The National Association of Realtors began reporting pending home resales in March 2005 and has supplied historical data back to February 2001. The gauge is considered a leading indicator because it tracks contract signings. The group's existing-homes sales report tracks closings, which typically occur a month or two later.

Commitments Lapsing

``Our members are telling us some sales contracts aren't closing because mortgage commitments have been falling through at the last moment,'' said Lawrence Yun, a senior economist with the Realtors group. ``There are continuing issues for subprime borrowers, but there are no serious problems for the majority of buyers who qualify for conventional financing.''

Yun also said there were signs the market had been ``stabilizing somewhat'' since mid-August.

The yield on the benchmark 10-year note declined to 4.47 percent at 5:15 p.m. in New York, from 4.55 percent yesterday. The Dow Jones Industrial Average dropped 143.4 points, or 1.1 percent, to 13,305.5. The Standard & Poor's Supercomposite Homebuilding Index slid 4.3 percent.

Existing home sales fell 0.2 percent in July to an almost five-year low of 5.75 million at an annual pace, the group reported on Aug. 27. Sales were down 9 percent from the same time last year.

New-Home Sales

Sales of new homes, which make up 15 percent of the market, unexpectedly rose in July, according to figures from the Commerce Department. More increases are unlikely, economists said.

``Homebuilder optimism and the trend in mortgage rates point to the fact that housing is still struggling,'' said Ryan Sweet, an economist at Moody's Economy.com in West Chester, Pennsylvania.

Builder sentiment reached a 16-year low in August and the rate on one-year adjustable mortgages climbed to a six-year high, according to industry figures.

Compared with a year earlier, pending home sales were down 16 percent.

Residential construction has subtracted from economic growth for six straight quarters, the longest stretch since 1982. Federal Reserve Chairman Ben S. Bernanke said last week that lending restrictions ``if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected.''

`Act as Needed'

Bernanke, speaking Aug. 31 to the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, also said the central bank ``will act as needed'' to prevent August's credit-market rout from undoing economic growth.

Traders and economists project Fed policy makers will cut the benchmark overnight lending rate between banks at or before their next meeting, scheduled for Sept. 18. On Aug. 17, the central bank reduced the rate charged on direct loans to banks to increase the availability of capital.

President George W. Bush on Aug. 31 said he will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers. The new program will allow homeowners with a good credit rating who can't afford their current payments to refinance into FHA-insured home loans.

Today's report showed pending resales dropped in all four regions. They fell 21 percent in the West, 13 percent in the Midwest, 12 percent in the Northeast and 6.6 percent in the South.

Toll Brothers Inc., the largest U.S. luxury homebuilder, said Aug. 22 that third-quarter profit fell 85 percent. Revenue dropped 21 percent and order cancellations jumped to 24 percent, from 18 percent a year earlier.

``We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets,'' Chief Executive Officer Robert Toll said on a conference call.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Last Updated: September 5, 2007 17:34 EDT