New home sales: Slowest in 6 years

Pace of new home sales slumps 4% to lowest since August 2000 as glut of homes on the market rises, hurting prices.

By Chris Isidore, senior writer

NEW YORK ( -- Sales of new homes sank to the slowest pace in more than six years in February, with the government's latest reading on the battered real estate market showing the glut of homes on the market reached a 16-year high.

New homes sold at an annual pace of 848,000 in February, according to a Census Bureau report, down about 4 percent from the 882,000 rate in January, which itself was revised lower. The pace of sales tumbled 18.3 percent from February 2006, with all four regions of the country showing sharp declines.

New home sales in February fell to their lowest point since August 2000, just before the nation tipped into a recession.
New home sales in February fell to their lowest point since August 2000, just before the nation tipped into a recession.
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Last month's pace was the slowest for new home sales since August 2000, just before the nation fell into a recession. Economists surveyed by had forecast sales would rebound to an annual rate of 995,000.

The supply of new homes for sale on the market rose to an 8.1-month supply from 7.3 in January. It was the biggest supply by that measure since January 1991. It is now taking builders 5.2 months on average to sell a completed home, the longest wait since April 2001.

The report was particularly disappointing after the National Association of Realtors on Friday reported an unexpected jump in existing home sales in February - a report that gave a lift to stocks that day. But new home sales, while a smaller part of the housing market, are more of a leading indicator since they are booked when a sales contract is signed, not when the sale is closed, as is the case with existing home sales.

The poor new home sales numbers sent shivers through U.S. financial markets, sending major stock indexes broadly lower.

Monday's report suggests the housing market weakened further in February rather than stabilizing, as the Federal Reserve had projected as recently as its January meeting.

Subprime jitters

The report also raised fears that problems in the subprime mortgage sector first seen in February could further batter the struggling real estate market.

"I really do think the mortgage mess has pretty seriously shocked these markets," said David Seiders, the chief economist for the National Association of Home Builders. He said that when his trade group surveyed members earlier this month, a third were already reporting that changes in the mortgage market and lending standards were cutting into their sales.

"The uncertainties out there right now feel so profound," said Seiders. "We don't know how the tightening of standards will be felt. There's no way to measure it at this point. But there's no reason to think there's going to be a near-term rebound. The fundamentals of the market feel a lot weaker than they did at the beginning of the year."

Paul Kasriel, chief economist with Northern Trust in Chicago, agreed that subprime problems are going to cause the housing market to weaken before it shows any signs of improvement.

"This may reflect the problems caused by subprime," he said. "If it hasn't, it's going to affect sales going forward."

The slowdown in new home sales is also a concern because home building had been an important driver of economic growth during a building boom of 2004 and 2005.

Kasriel said he believes that the nation's economy is close to tipping into a recession due to the weakness in housing and problems in subprime lending. He said he believes the Fed will have to cut interest rates as soon as August, if not sooner, if the economy is to avoid a recession.

Price points

The weakness in housing sales and inventory is also seen in the reports price readings.

The median price of a new home sold in the month slipped 0.3 percent from a year earlier to $250,000, although that price reading was up from January.

While that decline is modest, it is in itself a concern because it likely understates the weakness in builders' pricing power. About three quarters of home builders are now reporting having to offer buyers incentives, such as covering closing costs or offering extra features in the home at no cost, in order to sell houses.

The February price decline followed a 0.7 percent drop in prices in January compared with a year earlier, and it was the third time in six months there has been a year-over-year price decline. It has been four years since there's been that kind of sustained weakness in prices.

As recently as late summer 2005, builders had been seeing double-digit percentage price increases.

The nation's leading home builders have been reporting tumbling sales and earnings from the slump in home sales and prices.

On Thursday, KB Home (Charts), the No. 5 U.S. home builder, reported earnings plunged 84 percent and warned that higher foreclosures and tighter lending standards in the broader market could prolong weakness in the sector.

The CEO of D.R. Horton (Charts), the No. 2 U.S. builder by revenue, told an investor conference earlier this month that prices and new home sales are "going to suck" in 2007.

Earlier this month, New Jersey builder Hovnanian Enterprises (Charts) became the latest to report a loss following shortfalls at No. 1 home builder Lennar (Charts), No. 3 Pulte Homes (Charts) and No. 4 Centex (Charts).

Home prices: Don't expect a quick rebound Top of page