updated 8/24/2006 9:05:01 AM ET 2006-08-24T13:05:01

Wall Street fell for a third straight session Wednesday as fresh signs of a housing slump triggered concerns that the economy is slowing too fast and could erode corporate profits.

Major Market Indices

Investors believed that housing sales might be dropping more rapidly than anticipated, and theorized that a soft landing for the U.S. economy might be more difficult to achieve. The report from the National Association of Realtors that sales of previously owned homes dropped in July to a pace of 6.33 million units, the lowest since January 2004.

The data comes after a Federal Reserve official hinted Tuesday that higher interest rates may still be needed to tame inflation, a move that could curtail consumer spending. Retailers and homebuilders, which have the most exposure to consumers, led major indexes lower.

“Housing is a relatively important number and clearly an area that has been a driver for the economy, and now we’re trying to figure out if the Fed is done or if it needs to do more,” said John Caldwell, chief investment strategist for McDonald Investments, the securities unit of Cleveland-based KeyCorp.

“The focus now is on housing as the market shifts away from inflation and toward growth,” he said. “The question is has the Fed done too much, and is housing going to lead us down.”

The Fed left interest rates unchanged earlier this month after increasing them 17 straight times over the past two years. The markets had rallied since then on hopes this would be the end of rate hikes.

The Dow Jones industrial average finished the day down 41.94 points, or 0.37 percent. Combined with Monday’s and Tuesday’s losses, the drop erased last week’s five-day rally.

The broader Standard & Poor’s 500-stock index fell 5.83 points, or 0.45 percent, while the Nasdaq composite index dropped 15.36 points, or 0.71 percent.

Bonds bounced, with the yield on the benchmark 10-year Treasury note touching a multi-day high at 4.84 percent before dropping back to Tuesday’s close of 4.81 percent. The dollar was mixed against other major currencies, while gold prices moved lower.

Crude oil prices declined on the New York Mercantile Exchange after U.S. government data showed rising supplies of gasoline.

U.S. homebuilder stocks, already trading near yearly lows as housing sales remain depressed this summer, pulled back after Wednesday’s housing data were released. Toll Brothers Inc. dropped 65 cents, or 2.6 percent, to $24.55. Pulte Homes Inc., the nation’s largest homebuilder fell $1.02, or 3.5 percent, to $28.09.

Borders Group Inc. led a decline in retailers, tumbling 46 cents, or 2.3 percent, to $19.80. The book retailer reported swung to a second-quarter loss, and issued a disappointing outlook.

With light summer trading, these stocks could see further fluctuations on Thursday with more economic data coming out, including durable goods orders and new home sales for July.

“We’ve had this fixation on the interest rate increase cycle, and now that it’s moved to the middle burner, what’s on the front burner is economic growth,” said David Darst, chief investment strategist of the Morgan Stanley’s global wealth management group. “The housing market is a barometer for prices, wealth and the consumer state of mind.”

However, he pointed out, “we’re in the summer doldrums, and just the slightest puff of wind can move the market apparently quite a ways.”

Wall Street shrugged off National Semiconductor Corp.’s warning that first-quarter revenue will come in lower than expected due to sluggish shipments of wireless handsets. The Santa Clara, Calif.-based company, which makes chips that control power consumption in electronics, also said revenue was hurt by fewer overall shipments and reduced foundry revenue from divested businesses.

However, analysts say the drop off in sales was to be expected during a typically slow summer period. Shares of National Semi rose 79 cents, or 3.5 percent, to $23.37.

Computer maker Gateway Inc. jumped 23 cents, or 13 percent, to $1.95 after the company received an unsolicited offer from eMachines founder Lap Shun Hui to acquire its retail operations for $450 million. Hui, Gateway’s second largest shareholder, sold his business to Gateway in 2004.

IBM Corp. dropped 28 cents to $78.67 after it announced a $1.3 billion acquisition of Internet Security Systems Inc. for $28 per share. Internet Security Systems surged $1.62, or 6.2 percent, to $27.62.

Overseas, Japan’s Nikkei stock average closed lower by 0.11 percent. Britain’s FTSE 100 closed down 0.69 percent, Germany’s DAX index fell 0.81 percent and France’s CAC-40 was down 0.87 percent.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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