Real Estate

Mortgage crash hits new home sales

Sales hit 7-year low as lower prices can't clear out huge glut, new government report shows.

By Chris Isidore, senior writer

NEW YORK ( -- The mortgage bomb hit the demand for new homes even harder than expected in August, leaving the nation's builders with their weakest level of sales since the summer of 2000, when the nation was struggling with a stock market collapse, rising interest rates and a looming recession.

And the government's latest snapshot of the battered housing market, released Thursday, may actually be understating the problem: It does not account for the rising cancellation rates or sales inducements that builders have reported in recent months.

New home sales hit a 7-year low in August in the face of problems in the mortgage market.
New home sales hit a 7-year low in August in the face of problems in the mortgage market.
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According to the Census Bureau, new homes sold at an annual pace of 795,000 in August, down 8 percent from the revised 867,000 sales pace in July.

It was the slowest pace of sales since June 2000, as legions of buyers had trouble finding mortgages or selling their existing homes. Economists surveyed by had forecast that sales would fall to a pace of 825,000.

The report also showed the median price of a new home fell 7.4 percent from year earlier levels to $225,700 in the month, as prices were pressured by both the problems in mortgage finance and the excess supply of homes on the market.

The inventory of new homes on the market rose to an 8.2 month supply, as the glut of completed homes without a buyer was near a record high, with 180,000 completed homes listed for sale, just off the record high of 182,000 set in May of this year.

The July report wasn't the only month revised lower by the Census Bureau; it also dropped its sales estimates for May and June, leaving sales 34,000 below the previous estimates.

The decline in sales came despite a pickup in sales in the Northeast and Midwest compared to July. But the South, which accounts for nearly half of the nation's new home sales, saw a nearly 15 percent drop from July levels, while sales in the West declined more than 20 percent. Sales in each of the four regions were off more than 10 percent from year-earlier levels, and nationwide the pace of sales is down 21.2 percent from a year ago.

This is just the latest sign of trouble for the housing market. On Tuesday, a report from the National Association of Realtors showed the pace of existing home sales dropped in August for the sixth straight month to their lowest level in five years.

And the new home sales report likely did a better job capturing the turmoil in the real estate market in August, as it is based on contracts for new homes signed in the month. The existing home sales figures are based on when a deal is closed, typically a month or two after the contract is signed.

The new home sales report, besides serving as a leading indicator of the overall housing market, is closely followed because of the importance of construction to the overall economy. The home building boom helped support the nation's economic and employment growth during 2003 to 2005.

But economists are growing increasingly concerned that the current weakness could become a large enough drag on the economy to help tip the nation into recession. The latest report on gross domestic product, also released Thursday, shows investment in housing subtracted 0.6 percentage points from the nation's overall growth in the second quarter.

Still, as weak as the new home sales report is, experts caution it could actually be masking other signs of weakness. Builders have reported significantly higher cancellation rates for buyers who have signed a contract but then back out of the sale. So demand could be weaker than the report suggests.

Also about three quarters of builders surveyed by their trade group report offering incentives, such as paying for closing costs or offering additional features on a new home for free, in order to maintain demand. So the drop in prices could actually be more severe than the report indicates.

The nation's major home builders have been hammered by the downturn in both home sales and prices in the last year. On Thursday, KB Home (Charts, Fortune 500), the nation's No. 5 home builder, reported a loss in its most recent quarter, compared to a solid profit a year ago, as the company warned it expects conditions to worsen through 2008.

Lennar (Charts, Fortune 500), the nation's No. 1 home builder by revenue, posted a bigger than expected loss Tuesday.

In addition, No. 2 homebuilder D.R. Horton (Charts, Fortune 500) and No. 3 Centex (Charts, Fortune 500) both reported losses far bigger than Wall Street had expected, while No. 4 Pulte Homes (Charts, Fortune 500) and No. 6 Hovnanian Enterprises (Charts, Fortune 500) both have reported losses for the last two quarters and analysts project losses for at least the next year. Top of page