Dec. 4 (Bloomberg) -- Contracts to buy previously owned homes in the U.S. fell more than expected in October, suggesting the housing market has yet to hit bottom.

An index of signed purchase agreements fell 1.7 percent to 107.2 from 109.1 in September, the National Association of Realtors said today in Washington. The index dropped 13.2 percent from October 2005.

The housing slowdown threatens to weigh on the economy by removing a source of consumer wealth. The housing market may extend its slump as affordability remains close to the lowest in two decades and potential buyers wait for prices to fall further.

``People are waiting out the market,'' said Kristine Brittingham, an economist at the securities arm of Countrywide Financial Corp. in Calabasas, California. ``We expect continued weakness in existing-home sales. Inventories are bloated, and there's going to be a correction in both sales and inventories.''

Economists expected the index to fall 0.5 percent in October, the median of 19 forecasts in a Bloomberg News survey, after a decline of 1.1 percent the month before. Estimates ranged from a drop of 2 percent to an increase of 3.6 percent.

The index of pending home resales tracks contract signings, in contrast to the Realtors' report on existing-home sales, which tracks closings. The existing-home sales report is based on a sample of about 40 percent of transactions in the multiple listing service used by real estate agents, while the pending sales index covers about 20 percent.

Pending resales declined in all four regions from the prior month, today's report showed. They fell 2.7 percent in the West and 0.6 percent in the Midwest. Pending resales declined 1.7 percent in the South and 2.1 percent in the Northeast.

Interest Rates

Federal Reserve policy makers, who left interest rates unchanged at 5.25 percent at their last three meetings, are counting on the economy to slow without stalling.

``The correction to the housing market could turn out to be more severe and widespread than seems most likely at present,'' Fed Chairman Ben S. Bernanke said in a speech in New York last week. Even so, ``to date there is little evidence that the weakness in housing markets is spilling over more broadly to consumer spending or aggregate employment.''

Sales of existing homes unexpectedly rose 0.5 percent in October, the first gain in eight months, the Realtors' group reported on Nov. 28. The median selling price fell 3.5 percent from a year earlier to $221,000, the biggest year-over-year decline on record.

Forecasts

Sales of previously owned homes will fall 8.6 percent this year after reaching records the five prior years, the Realtors forecast on Nov. 10. New home sales, which make up about 15 percent of the housing market, are expected to fall 16.8 percent.

The Realtors' group's data on pending home sales go back to January 2001. The organization started publishing the index in March of last year to provide a leading indicator for resales.

Federal Reserve Bank of St. Louis President William Poole said Nov. 14 that Fed policy makers were giving the housing market ``special attention,'' and that it was unclear whether the slump would deepen.

The economy grew last quarter at its slowest pace this year, held back by the biggest decline in residential construction in 15 years. Fed policy makers have forecast a ``moderate'' pace of economic growth.

``Until the inventory level comes down a bit and buyers do step up to the plate and sellers do come down, there's still more room for correction,'' said Bob Moulton, president of Manhasset, New York-based Americana Mortgage Group. ``Now it's just a matter of playing the waiting game.''

Affordability

Housing was more affordable in October than in the previous month, the Realtor's group reported last week. The composite homebuyer index rose to 107.1 from 106.5. A value of 100 means that a family with the national median income has exactly enough income to qualify for a mortgage on a median-priced home. An increase in the index means that a family is more likely to be able to afford the median-priced house.

Still, affordability is close to the lowest in 20 years. In July, the index fell to 99.6, the lowest since March 1986, when the reading was 99.5.

Declining borrowing costs are providing some relief to buyers. The average rate on a 30-year fixed-rate mortgage fell to 6.14 percent in the week ended Nov. 30, the lowest since January, from 6.18 percent the prior week, Freddie Mac reported. The rate is down from this year's peak of 6.8 percent in July.

New-Home Sales

Sales of new homes fell a greater-than-expected 3.2 percent in October, the Commerce Department reported last week. The supply of unsold homes at the current sales pace rose to seven months' worth.

Profits are falling at builders as they offer incentives such as free granite kitchen counters to reduce the supply of unsold homes.

Earnings last quarter tumbled by more than half each at D.R. Horton Inc., based in Fort Worth, Texas, and at Pulte Homes Inc., based in Bloomfield Hills, Michigan.

``As we look forward to 2007 we will have a more challenging year,'' Donald Tomnitz, chief executive of D.R. Horton, said last month.

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

Last Updated: December 4, 2006 10:28 EST