By Lucia Mutikani
WASHINGTON (Reuters) - Contracts to buy previously owned U.S. homes hit a 10-month low in October, but a strong rebound in services sector activity early this month suggested some resilience in the economy as the year winds down.
The National Association of Realtors said on Monday its Pending Home Sales Index, based on contracts signed last month, slipped 0.6 percent to 102.1, the lowest level since December.
It was the fifth straight month of declines in contracts and suggested home resales could remain on the back foot for the rest of this year. These contracts become sales after a month or two. Home resales fell in October for a second straight month.
"The data suggest sluggish home sales going into the end of the year and that the tightening of financial conditions this summer did have a negative impact," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.
Contracts fell 4.6 percent in September. They were down 1.6 percent compared to October last year.
Economists, who had expected pending home sales to rise 1.3 percent in October from September, said the weak home sales trajectory could see the Federal Reserve sticking to its $85 billion monthly bond buying program until early next year.
The U.S. central bank has targeted housing as a channel to boost growth and speed up job creation. It noted at last month's meeting that the housing sector recovery had slowed somewhat in recent months.
The Realtors group said October's 16-day partial shutdown of the federal government had sidelined potential buyers.
According to the NAR, a survey of realtors found 17 percent of respondents reported delays in signing contracts because they had to wait for the Internal Revenue Service to verify income before the mortgage could be approved.
The Realtors group expected a bounce back in contracts, but it cautioned that lack of inventory remained a constraint.
"Early data for November look a little better, with separate data on mortgage purchase application volumes perking up in the middle of the month from a very low level," said Daniel Silver, an economist at JPMorgan in New York.
"The weekly purchase application data are very volatile, but it is possible that this signals activity picking up to some degree very recently or at least flattening out."
Home sales have been dampened by a rise in mortgage rates.
Interest rates have risen sharply since May as markets anticipated the Fed would start cutting back on its monthly bond purchases this year, with the 30-year fixed mortgage rate surging nearly a full percentage point.
It hit 4.49 percent in September, the highest since July 2011, according to Freddie Mac. But rates have been retreating as expectations of a Fed taper are pushed to early next year.
Though housing is cooling, the economy appears to have retained some of the upward momentum from the third quarter.
In a separate report, financial data firm Markit said its preliminary Purchasing Managers Index for the services sector rose to 57.1 this month from a record low 49.6 in October.
This is the first month that Markit is publishing data on the services industries, which it has been compiling since October 2009. Readings above 50 signal expansion in the services industries.
The services sector survey adds to data such as retail sales and nonfarm payrolls that have painted a fairly upbeat picture of the economy early in the fourth quarter.
Economists expect a slowdown in gross domestic product growth this quarter as businesses cut back on inventories after rapidly accumulating stocks in the July-September quarter.
"With other data showing the recovery in the labor market still on track, and confidence moving up again, we expect home sales to start trending up again in coming months," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York.
"For now, though, the weaker data are a reason for the Fed to remain cautious about tapering."
Pending home sales were up in the Northeast and Midwest. They dropped 4.1 percent in the West.
(Reporting by Lucia Mutikani Additional reporting by Ryan Vlastelica in New York; Editing by Andrea Ricci)
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