Preview: Further Deterioration Expected in New Home Sales

As the overhang of new homes sits at a 27-year high of 9.8 months, new home sales are expected to fall for a fifth consecutive month in the March index from the U.S. Census Bureau on Thursday.

In February's report, sales fell 1.8% to a seasonally adjusted annual rate of 590K, contributing to an almost 30% decline since February 2007, when the pace was 840,000. Also, the median price of new houses sold in February was $244,100, a sizeable increase from the $225,600 figure from a month prior.

Of the 75 economists surveyed for the March release, the consensus is looking for a 1.7% decrease to 585K, with the lowest predictions expecting 560K sales and the most optimistic forecasting a rebound to just over the 600K mark. A number below 559K would mark the lowest pace of sales since February 1995.

Ellen Zentner, U.S. macro economist at the Bank of Tokyo-Mitsubishi, expects the index will fall 0.7% to 586K, but she said traders have already priced in a lot of negativity, so unless the results are really unexpected, it won't cause much reaction.

Earlier this week, the NAHB/Wells Fargo survey of builder confidence remained subdued at 20, where it has been for three months after rising from the record low of 18 in December 2007. Zentner said that consistency could point towards some stabilization from the supply side, so a similar sign on the demand front would be welcomed by the markets.

However, four factors are preventing the housing sector from improving, she said. First, credit conditions remain tight. Second, until prices stop deflating, potential homebuyers will sit on the sidelines. Third, the economy continues losing jobs, and fourth, consumers are worried about inflation eating up their disposable income, which prevents them from buying big-ticket items.

Benjamin Reitzes, economist at BMO Capital Markets, said confidence is down for both builders and consumers, and he predicts several months of decline until the housing sector finally bottoms out near 500K in the second quarter of this year. As for the March report, he looks for a number below consensus at 575K, noting that even a worse figure would still not garner much attention.

The first housing index to display a bottoming out will be the housing starts report, he added, noting, "The quicker new home sales decline, the quicker house starts will decline."

Zentner said the new home sales index "is a direct window to housing starts." She said new homes only make up 14% of the housing sector, but their link to housing starts acts as a tool to forecast construction activity.

In the longer term, Zentner said the housing market will not make a turnaround until 2010, or at best, in late 2009.

Until that time, because housing is actually "tiny in terms of GDP," the housing sector should neither drag nor boost economic growth, she said, adding that the initial impact on the broader economy came only from the big swing in the housing market.

In February's new homes report, regional data was quite mixed, as the pace of sales in the Northeast fell from 62,000 to 37,000, while in the Midwest sales dropped from 78,000 to 73,000. However, the South saw the pace of sales go up from 315,000 to 333,000, and the pace in the West moved up 1,000 to 147,000.

By Patrick McGee and edited by Cristina Markham