New home market hammered

NEW YORK (CNNMoney.com) -- The battered real estate and home building markets took another body blow Thursday as a government reading showed a bigger than expected drop in new home sales, and the nation's top builders posted large losses due to the weak market and took charges for the declining value of their holdings.

The news battered the overall stock market as it raised concerns that the crisis in home sales and building could be a bigger drag on the economy than previously expected. The Dow Jones industrial average was down as much as 322 points in midday trading.

The battered home building and real estate markets showed even greater than expected weakness in government and company reports Thursday.

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New homes sold at an annual pace of 834,000 in the month, down 6.6 percent from the revised 893,000 rate in May. That left sales down 22.3 percent from year-ago levels.

It was the fourth slowest pace of sales since 1998, trailing only June 2000, September 1999 and March of this year.

Economists surveyed by Briefing.com had forecast sales would slow to only a 900,000 annual sales rate in June.

"I don't' find the number surprising, given all the weakness we're seeing in the sector," said John Tomlinson, a stock analyst with Majestic Research who follows the publicly-traded builders. "Our data points to things weakening further."

The downturn in housing is battering results of leading home builders. Thursday morning D.R. Horton (Charts, Fortune 500), the nation's No. 2 home builder by revenue, reported a bigger than expected loss as it took pre-tax charges of $1.2 billion to recognize the lower value of its inventory and goodwill.

Beazer Homes (Charts, Fortune 500), the No. 8 builder, also reported a loss, Thursday, and after the market close Wednesday, No. 3 builder Pulte Homes (Charts, Fortune 500) and No. 9 Ryland Group (Charts, Fortune 500) also reported losses, although some of the losses were less than forecast.

Late last month Lennar (Charts, Fortune 500), the nation's largest home builder by revenue, reported an unexpected loss in the most recent quarter, as did KB Home (Charts, Fortune 500), the nations' No. 5 builder.

David Seiders, chief economist for the National Association of Home Builders, said the group's survey of members continued to show declines in July, so he thinks the weak June report is probably not the end of the slump.

"Searching for the bottom is still an adventure. Our current forecast has a bottom in the third quarter," he said. "I think momentum is still downward. Inventory overhang is pretty darn heavy, and that will delay the bottom for starts. And once we get into any upswing, it's going to be awfully gradual, slogging on for a couple of years."

The nation's top builders have been hammered not only by weak sales but also falling prices. That was further seen in Thursday's report that showed the median price of a new home fell to $237,900, down 2.2 percent from $243,200 a year earlier.

Part of the problem for pricing is rising mortgage rates and problems in the subprime mortgage market, both of which are raising the cost of borrowing for potential buyers and limiting how much they can afford to borrow.

But a glut of new homes on the market has also pushed down prices. There were 537,000 new houses for sale at the end of June, unchanged from May despite builders putting a break on new home construction. That represents a 7.8-month supply of homes, according to the report.

The government figures may not fully reflect the softness in new home prices, as roughly three-quarters of builders surveyed by their trade group say they are offering incentives such as covering closing costs or offering home features for free in order to support sales.

The sales of new homes are recorded at the time a sales contract is signed, so the sales pace may also be a bit overstated due to a rise in cancelled orders being reported by many builders.

The report follows a reading from the National Association of Realtors on Wednesday that showed the pace of existing home sales falling to their lowest level since November 2002.

While new home sales make up only a fraction of the overall real estate market, Thursday's report is closely watched as a more forward-looking reading than existing home sales, which are recorded at the time of closing, typically a month or two after a sales contract is signed.