Stocks drop after new home sales fall to record low in May; End of tax credits hurts demand

Stocks slide after new home sales drop 33 percent

NEW YORK — Stocks fell Wednesday after new home sales dropped 33 percent last month to a record low following the end of homebuyer tax credits.

The Dow Jones industrial average fell about 40 points in midday trading. Broader indexes also fell. Treasury prices rose, pushing down interest rates. The yield on the benchmark 10-year Treasury note fell to its lowest level in more than a year.

Trading volume was light, as it has been all week. Part of the slow morning trading came as traders watched World Cup matches. Yelling erupted on the floor of the New York Stock Exchange when the U.S. beat Algeria.

The government’s report that new homes sales fell to a seasonally adjusted annual pace of 300,000 was far weaker than expected. Economists polled by Thomson Reuters had forecast sales would drop nearly 19 percent to a seasonally adjusted annual rate of 410,000.

On Tuesday, an unexpected drop in sales of existing homes also hurt stocks. Existing homes are a far bigger part of the market than new homes. Traders were braced for more bad news Wednesday.

“I think the market is, thankfully, already getting used to the idea that housing is going to fall off a cliff between the end of the homebuyer tax credit and now,” said John Canally, economist at LPL Financial. “The question is are we going to continue to dip further in May and June and July?”

The housing report pushed traders into stocks of companies that sell consumer staples because they are considered safer in weak economies. Procter & Gamble Co., which makes Tide detergent and Gillette razors, edged higher. Kraft Foods Inc. also rose.

The market’s slide came as traders awaited the Federal Reserve’s latest assessment of the economy. Investors will be looking for clues on whether policymakers still expect a slow recovery. The central bank is widely expected to keep interest rates steady following its two-day meeting that wraps up Wednesday afternoon.

The Fed has said rates will remain low for the time being to help a rebound. Any indications of growth would be a welcome sign for a market that has been choppy and volatile in recent weeks.

Low rates help the stock market because they give investors few alternatives for big profits aside from stocks. A low federal funds rate helps limit returns in the bond market.

High unemployment and weakness in housing are two of the main reasons the Fed has been able to keep rates low. Uncertainty surrounding a recovery in the jobs and housing markets have cast doubt on the pace of the economic recovery.

In midday trading, the Dow fell 41.49, or 0.4 percent, to 10,252.03. The Standard & Poor’s 500 index fell 7.77, or 0.7 percent, to 1,087.54, and the Nasdaq composite index fell 16.63, or 0.7 percent, to 2,245.17.

The dollar rose against other major currencies.

Bond prices rose after the housing report, driving down interest rates. The yield on the 10-year note fell to 3.12 percent from 3.17 percent late Tuesday. It was the lowest level since May 2009.

Crude oil fell $2.08 to $75.77 per barrel on the New York Mercantile Exchange.

Procter & Gamble Co. rose 19 cents to $60.91, while Kraft Foods Inc. rose 13 cents to $29.49.

About two stocks fell for every one that rose on the New York Stock Exchange, where volume came to 380 million shares, compared with 348 million shares traded at the same point Tuesday.

The Russell 2000 index of smaller companies fell 3.32, or 0.5 percent, to 642.59.

Britain’s FTSE 100 fell 1.3 percent, Germany’s DAX index dropped 1 percent and France’s CAC-40 fell 1.7 percent.