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

The index of signed purchase agreements, or pending home resales, fell a less-than-forecast 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. Gains in the South and Northeast offset weakness in the West and Midwest.

The drop in prices has attracted some buyers, preventing even steeper sales declines as the economy sinks into what may turn out to be the longest recession in the postwar era. Still, banks, resisting Treasury and Federal Reserve efforts to unleash lending, have been reluctant to write mortgages as record foreclosures drive down property values and widen losses.

“I wouldn’t say this is a great sign for the housing market, but at least there is some activity,” said Adam York, economist at Wachovia Corp. in Charlotte, North Carolina. Next year “will still be a very tough year for housing. So much of the activity is distressed sales that it’s tough to say whether there is underlying support for the market.”

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, Foreclosures

President-elect Barack 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.

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 sown 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.

Builder Stocks

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.

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.

Behind on Payments

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.

Prices “have to decline another 10-15 percent before they get back to pre-bubble levels,” Martin Feldstein, a Harvard University economics professor, said in an interview today with Bloomberg Radio. “The danger is it’s worse than that.”

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 10:15 EST