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New home sales tumble
November's 12% drop, sharpest since '94, follows sharp dip in construction; should you be worried?
December 23, 2004: 4:01 PM EST
By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - Sales of new homes took the sharpest plunge in more than a decade in November, the second report in a week that raised questions about the strength of the nation's real estate market.

Are the drops in home sales and home building worrisome signs for the housing market?

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Sales tumbled 12 percent last month to an annual rate of 1.125 million new homes, the government reported, coming in well below most economists' forecasts. It was the weakest sales pace since July and the sharpest percentage decline since January 1994.

Sales of new homes are just a fraction of all home sales, but since they're reported when contracts are signed, rather than at closing, they're more of a leading indicator about the housing market.

Existing home sales, on the other hand, while a far bigger part of the market, are reported at closing, typically a month or two after sales contracts are signed.

The new-home sales report is the second in a week signaling a possible slowdown in the nation's red-hot housing market.

Last week the Commerce Department reported that November housing starts posted the biggest drop in nearly 11 years, raising worries about the housing market and the strength of home prices in the long run.

In that report, the department said starts on new homes and apartments slumped 13.2 percent, and came in well below forecasts by most economists.

Thursday's report also showed widespread weakness.

Sales last month faltered in every region except the South -- the largest regional market -- where they rose 13.6 percent. By contrast, sales fell 7.1 percent in the Northeast, 27.9 percent in the West and a whopping 39.4 percent in the Midwest.

The average new home sale price fell 5 percent to $268,100, while the median home price fell 8 percent to $206,300. The median price is the point at which half the new homes sell for more and half sell for less.

While month-to-month price drops aren't that unusual, the drop in November helped pull prices lower from a year earlier, which is far less common.

The drop in sales and prices, following the weak construction numbers, could be an early warning sign of trouble ahead in the real estate market, some economists said.

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But even one of those who believe there is a so-called "bubble" in housing prices said it's too soon to say the bubble has burst.

"These monthly numbers are very erratic," said Dean Baker, co-director of the Center for Economic Policy Research. "It can be that this is a sign (of the bubble bursting), but I would never make too much of one month's number. Especially since the other timely data we get, the mortgage applications for home purchases, have still been pretty high."

Baker said he remains convinced there is a housing bubble about to burst, even if he's not ready to say the latest reports are a sign of that. He said if there is another month of weak new home sales and housing starts figures for December, that would raise a red flag that the bubble is truly bursting.

Similarly, Robert Brusca of FAO Economics said the year-over-year drop in prices is worrisome but not necessarily a sign of trouble ahead. Other factors, however, could signal a weaker housing market in 2005.

"(Housing) has been in a sharp run-up. Income growth is not exactly taking off. Interest rates are rising. Affordability will be diminishing," he said. "Home ownership is already very widespread. Excess demand for housing is unlikely to be anything like what it has been in past years. Some setback in 2005 would be no surprise at all."

Home sales have been a bulwark of the latest economic expansion, helped by relatively low mortgage rates that have enabled buyers to take out bigger loans. But prices also have risen in much of the country, possibly to levels that keep would-be buyers from qualifying for mortgages in some areas.

The supply of new homes for sale also climbed significantly in November, up to 4.5 months' worth at last month's sales rate, compared with 3.9 months in October. The November supply was the highest since a matching 4.5 months' worth seen in February 2003.  Top of page

-- Reuters contributed to this story.

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