New home sales tumble in '06

NEW YORK (CNNMoney.com) -- New home sales plunged 17.3 percent in 2006, the biggest drop in 16 years, although warm weather in the Northeast gave a better than expected lift to December sales.

The Census Bureau reported Friday that new home sales finished the year at 1.06 million, down from the record 1.28 million reading in 2005.

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But new homes sold at a stronger annual pace of 1.12 million in December, up from the revised 1.07 million million pace in November. Economists surveyed by Briefing.com had forecast a sales pace of 1.05 million, essentially the same as the original November reading.

Sales in the Northeast soared a seasonally adjusted 27.3 percent in December, helped by milder-than-usual weather. Unlike existing home sales, which are booked when a sale closes, generally a month or two after a contract is signed, new home sales are recorded with the signing of a sales contract.

The Midwest, which also saw some mild weather, also got a 26.6 percent rise in sales, while the South, the most active region for new home sales, saw sales edge up only 3.3 percent and the West saw a 4.4 percent decline.

Even with the pickup in sales in December, the report shows the supply of completed homes available for sale rose to a record 172,000 in December, up nearly 50 percent from a year earlier.

Total new homes available for sale, which includes homes permitted but not yet started as well as those under construction, was 539,000 in the month, up a more modest 4.7 percent from a year earlier, and down 5.4 percent from the record supply seen in August.

Still, that glut of homes on the market continues to place downward pressure on prices. Even with the strong sales in the high-priced Northeast, the median home price for the month of $235,000 was down 1.5 percent from the year-earlier price reading, another sign of continued weakness in the market. Median price is the point at which half the homes sell for more and half sell for less.

The full-year median price of $245,300 was up 1.8 percent from the full-year 2005 average, but that price does not reflect the various sales incentives such as extra features or closing costs that the majority of builders are reported offering to support weak sales.

John Tomlinson, an analyst with Majestic Research who follows the stocks of major home builders, says the weather-impacted December readings are not enough to say that the new home market has found a bottom.

"This is such a seasonally slow time of the year, I think we'll have to see how sales pickup in the March or April," said Tomlinson. "They still have to clear the high level of inventories before they'll rebound."

Major homebuilders such as Lennar (Charts), Pulte Home (Charts), KB Home (Charts), Centex (Charts), D.R. Horton (Charts) and Toll Brothers (Charts) all saw sharp declines in earnings in 2006 with the slump in home building and new home prices.

Alan Gayle, senior investment strategist, Trusco Capital Management, the asset management arm of SunTrust Banks, also agrees it may be a year or two before the home building and new home sales market show some significant strength.

"We think the market is trying to find a bottom, but what we're seeing is still some very significant discounting going on," said Gayle. "I think we're going to see some further softness in the first half of the year. By the second half we will have gone through the worst of this slowdown. But a resumption of trend growth in housing could be another year or two off."

But David Seiders, the chief economist for the National Association of Home Builders, said the demand for new homes is showing relatively decent strength, falling only to near 2003 levels, which was a record at that time.

"We knew all along that 2004 and 2005 were unsustainable binges," he said. "If we can move ahead from the average we saw in '06, we'll be happy as clams."

But he said if new home prices are going to show strength again, builders will need to keep housing starts and construction slow a while longer to burn off the inventory left over from the building boom.

"The builders do need to move that off and they know it," he said about the supply of completed homes available for sale on the market.

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Existing home sales plunged in 2006