New home sales tick up 2.7%

New home sales show some signs of life, but September sales were still a third lower than year-ago levels.

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By Les Christie, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Sales of newly constructed homes rose in September, according to the monthly report from the U.S. Census Bureau, inching up 2.7% from August to an annualized rate of 464,000.

The reading was above the consensus forecast of 450,000, according to economists surveyed by Briefing.com, and up slightly from the 17-year low in August, which saw 452,000 new home sales.

But the reading was still the worst September for new home sales since 1981. Sales are down 33.1% from September of 2007, and far below the pace of the boom years. In 2005, for example, 1.3 million new homes were sold.

In response to slower sales, home builders have been reducing their production. As a result inventory has fallen, but there were still about 394,000 new single family residences on the market at the end of September. At the current pace of sales, that would take 10.4 months to sell through.

The median selling price for a new home was $218,400 during the month, down from $221,900 in August, while the mean selling price was $275,500, up from $263,900.

Sales up where prices are lowest

"We're clearly seeing some pick-up in regional areas where home prices have fallen," said Mike Larson, a real estate analyst with Weiss Research. "The drops have spawned some bottom fishing."

Indeed, according to the report new homes sales jumped 22% in the West, which has seen some of the nation's steepest price drops, while sales in other regions were down or flat. However, sales in that region are still off nearly 38% on a year over year basis.

Larson added that homebuilders have made a concerted effort to move inventory by rolling out incentives such as free upgrades and reduced rate financing. That means that buyers may be getting even better deals than the lower median home prices indicate.

"The true price decline is probably even greater," said Dave Seiders, chief economist for the National Association of Home Builders (NAHB).

About 65% of homebuilders surveyed by the NAHB report offering customers free upgrades, such as marble countertops, according to Seiders.

Other popular incentives include paying closing costs, which 57% of homebuilders report doing, and buying down mortgage interest rates, a practice reported by 21% of companies. About 24% of builders have even been helping customers sell their existing homes, and 15% are accepting trade-ins.

Although Larson conceded that the latest Census Bureau numbers were positive, he cautioned that they were tallied before the financial crisis fully took hold in mod-September.

"The rest of 2008 will probably not be as good," he said.

More turmoil ahead

Homebuilders seem to agree with that assessment. Earlier this month, the NAHB reported that builder confidence had fallen to a record low.

"Our surveys of builders show ongoing concern over financial market turmoil," said Seiders, "as well as weakness in the general economy and in the job market."

Two housing industry experts cautioned that the uptick in new home sales, as well as the slight rise in existing home sales reported last week, should be kept in perspective.

"The fact that new houses are selling is good news," said Nicholas Retsinas, of the Harvard Joint Center for Housing Studies, "but monthly numbers are very volatile."

And Patrick Newport of IHS Global Insight points out that these September figures are being compared to a very poor August report.

"The September numbers were a small bounce back from the double-digit plunge of the month before," said Newport. "But what really struck me was that new home sales in the western region were down 38% [year-over-year] while Septembers existing home sales were up 34% in that region."

The problem: New home builders are competing with dirt-cheap existing homes that are in foreclosure. About 40% of sales out west are distressed properties, homes that have been repossessed by lenders or are short sales in which lenders agree to sell a home for less than what is owed on it. Builders, who have to cover their costs, can only slash prices so much.

Add to that the current economic and financial market turmoil - especially job losses - and you have a recipe for hard times ahead in the home construction industry, according to Retsinas.

"The most important factor influencing home sales is jobs," he said. "That does not bode well for the housing market." To top of page

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