New Home Sales: A Stunning Slide

Sales plunged last month to their lowest level in more than 12 years, a grim testament to the problems plaguing the housing sector

A Commerce Dept. report released on Dec. 28 showed U.S. new-home sales plunged 9%, to a 0.647 million unit annual rate in November, from a downwardly revised 0.711 million in October (from 0.728 million previously). Market forecasters had expected a more modest decline to 0.715 million. Following downwardly revised numbers for August and September, new-home sales are stuck in a steep downtrend.

New-home sales dropped by 19.3% in the Northeast, 27.6% in the Midwest, and 6.4% in the South. However, sales increased by 4% in the West. Over the last 12 months, new-home sales nationwide have tumbled by 34.4%, the biggest annual slide since early 1991, and stark evidence of the painful collapse of the once high-flying housing market.

The supply of homes for sale rose to 9.3 months' worth from 8.8 (revised from 8.5). Whereas earlier sales and price data had suggested big price cuts by homebuilders were clearing inventory, this pattern has been reversed with the November data and revisions.

Stocks Retreat From Earlier Highs

The median price figures were surprisingly firm, according to Action Economics, rising to $239,100, vs. an upwardly revised $229,500 in October (previously $217,800). Prices are down 0.4% over last year, however. Bear Stearns economist John Ryding called the report "miserably weak." "[The report] shows, once again, it is too soon to talk about stabilization in housing activity," he wrote in a Dec. 28 note.

Treasury yields sprinted lower on Dec. 28 following news of the plunge in new-home sales. Stocks retreated from earlier highs, while the U.S. dollar edged lower vs. other major currencies. Fed funds futures prices climbed on the back of the worse-than-expected new-home sales data. Traders have priced in an 84% chance for a 25-basis-point rate cut by the Federal Reserve in January, which would put the Fed funds rate target at 4%.

Problems Likely to Persist

The housing market has been suffering through a severe slump following five years of record-breaking activity from 2001 through 2005. Sales turned weak as did prices. The boom-to-bust situation has increased dangers to the economy as a whole and has been especially hard on some homeowners.

Foreclosures have soared to record highs and probably will keep rising. A drop in home prices left some people stuck with balances on their mortgages that eclipsed the worth of their home. Other homebuyers were clobbered as low introductory rates on their mortgages jumped to much higher rates that they couldn't afford.

With credit now harder to get to finance a home purchase, the problems in housing have grown worse. Unsold homes have piled up, and the problems are expected to persist well into next year.

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