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Money and Main Street

Surprise drop in new home sales

Sales of newly constructed homes fell 3.6% in September, after five months of gains, according to a government report.

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By Ben Rooney, CNNMoney.com staff reporter

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NEW YORK (CNNMoney.com) -- Sales of newly built homes fell unexpectedly in September after rising for five straight months, according to government figures released Wednesday.

The Commerce Department said new home sales fell 3.6% to a seasonally-adjusted annual rate of 402,000 last month, from a downwardly revised rate of 417,000 in August. It was the first time new home sales declined since March.

Economists surveyed by Briefing.com had expected September new home sales to rise to a rate of 440,000 units.

"We're attributing most of the decline to the potential expiration of the new home-buyer tax credit," said Adam York, an economist at Wells Fargo. "It's getting harder to buy a house and no one wants to close after the credit expires," he added.

In addition to relatively low prices and attractive mortgage rates, the housing market has been supported in recent months by a temporary government tax credit for first-time homebuyers.

The tax break. The credit can be worth up to $8,000 for eligible buyers,but is set to expire at the end of November. Congress is expected to extend the credit, but the terms are still being debated.

Most economists believe that the drop in September's new home sales was driven primarily by the tax credit's timetable -- but not all of them agree.

Mark Zandi, chief economist at Moody's Economy.com, contends that first-time homebuyers are more likely to buy an existing home than a new home, which suggests that the tax credit is less of an issue for new home sales.

Zandi attributed the increase in new home sales over the past five months to low interest rates and more aggressive FHA lending. And he adds that these recent increases haven't been spectacular. "All we can say is the new home market is stabilized."

Foreclosures still loom. Wednesday's report highlighted concerns about the long-term outlook for the housing market, which remains challenged by rising unemployment and a glut of foreclosed properties on the market.

A separate report showed Wednesday that applications for home loans, considered a leading indicator of sales, fell for the third week in a row last week.

The Commerce Department report showed the median sales price jumped to $204,800 in September from $195,200 the month before. The average sales price rose to $282,600.

The price increase echoed an industry report released Tuesday that showed home prices in 20 major markets rose for the fourth month in a row during August.

Meanwhile, the estimated number of new homes for sale at the end of last month fell to 251,000 units on a seasonally adjusted basis. That's down from 262,000 unsold homes last month and was the lowest level since November 1982.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the drop in housing inventory means the market is moving towards a better balance of supply and demand. "But the tax credit story is the key element right now," he added.

He said that the credit's looming expiration will probably mean that home sales will fall again in October and, depending upon where the legislation stands, in November as well.

At the current sales pace, it would take 7.5 months to sell through existing inventory, according to the report. That's up from the previous month, when the there was about 7.3 months of inventory on the market.

-- CNN senior writer Jeanne Sahadi contributed to this report.  To top of page

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