No sign of life yet for new home sales

May reading shows ongoing slump at start of key selling season; prices fall; April sales revised lower.

By Chris Isidore, senior writer

NEW YORK ( -- New home sales posted a surprising drop at the start of the crucial spring selling season in May - the latest sign that the battered housing market could have a ways to go before hitting bottom.

The pace of new home sales fell 1.6 percent to an annual rate of 915,000 last month, the Census Bureau reported, from April's 930,000 pace, which itself was revised lower. Economists surveyed by had forecast a rate of 925,000.

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While sales picked up from the early part of the year, they tumbled 15.8 percent from May 2006 - marking the 18th straight month of year-over-year declines.

The reading was also the weakest performance for May since 2001, before a sharp drop in mortgage rates sparked the housing boom, and came during the start of the spring selling season that is so crucial to home builders.

The median price of a new home sold last month slipped to $236,100, according to the report, down 0.9 percent from a year earlier.

Yet the drop in prices may be even more severe than indicated, since about three-quarters of builders are offering incentives like free closing costs or extra features at no additional cost in a bid to bolster sales.

The glut of new homes on the market improved a bit, with completed homes for sale down to 177,000 from 179,000 in April. Total new homes for sale, including those under construction and not yet started, edged down to 536,000 from 537,000.

But that supply of completed new homes for sale is still up 38 percent from a year ago, and the typical wait for a builder to sell a completed home now stands at 5.7 months, two months longer than a year earlier.

Economists said that while more bad news from the housing sector is not a surprise at this point, it is a sign that no improvement is on the horizon.

"We're just in the early stages of the decline in housing," said Bill Hampel, chief economist at Credit Union National Association, who said the recent rise in mortgage and other interest rates will only make a bad situation worse.

"It's going to be moribund through the rest of this year to late next year," he predicted. "It's not going to plummet. But it's going to get weaker month-to-month, and probably bottom out late this year or early next."

While new home sales are only a fraction of the overall housing market, they're seen as more of a leading indicator for the real estate market than existing home sales, which had the weakest sales in four years last month, according to separate report Monday. New home sales are booked when a contract is signed, while sales by homeowners are tracked at closing, typically a month or two later.

The existing home sale report from the National Association of Realtors Monday also showed a nearly nine-month supply of homes on the market, the biggest since 1992.

The glut of homes for sale, along with the decline in prices and pace of new home sales, have hit results at the homebuilders and slowed the pace of economic growth for the last year.

Separately on Tuesday Lennar (Charts, Fortune 500), the nation's No. 1 builder by revenue, reported an unexpected loss in the second quarter and warned it sees weak and perhaps deteriorating market conditions, and another loss, in the third quarter.

Other major builders, including D.R. Horton (Charts, Fortune 500), Centex (Charts, Fortune 500), Pulte Homes (Charts, Fortune 500), KB Home (Charts, Fortune 500), and Toll Brothers (Charts, Fortune 500), have also been hurt by the downturn in the market. Top of page