Double-Digit Decline in New Home Sales Suggests Turnaround is Months Away

August recorded a substantial decline in the pace of new home sales, even with the median price for a home falling 5.5% in the month. The pace of sales fell 11.5% over the month, pushing the annual rate of sales down to 460k from the 520k pace in July. Economists say sales aren't expected to recover any time soon.

Ian Pollick at TD Securities called the report "undeniably pessimistic," especially as the pace of unsold homes rose to a 10.9-month supply. "This was an extremely weak report and there is no way to color it any other way," he added.

The month-over-month decline marks the largest drop since November 2007, pushing the pace of sales to the slowest rate since January 1991.

"The housing outlook remains bearish, given the weak underlying fundamentals of excess supply, falling prices and tighter credit," said Sireen Hajj at Calyon. "The significant pullback in homebuilding is slowly whittling away the inventory overhang of new homes for sale and the rate of home price depreciation has been slowing but we still have a while to go before the situation stabilizes."

Patrick Newport, economist at Global Insight, said the drop was big but that the report is volatile and has a tendency to jump all over the place. Comparing the release to the rest of the morning, he said the durable goods index was of much more significance.

Newport added that while many people believe the economy will begin to recover once the housing market turns around, that may not be the case. The current turmoil began with the housing sector, but it has spilled over into many areas and weakness is now widespread, he said, adding that the decline in the durable goods report earlier in the morning confirms broad weakness.

Newport said housing may recover in early- or mid-2009, but it will take longer for the broader economy to recover, which could be sluggish for all of next year. He expects GDP growth in 2009 to be just 0.5%.

Hajj, who doesn't expect housing to recover until late 2009, said the 5.5% monthly drop in the median home price raises a concern that homeowners with negative equity positions will default on their mortgages. "We believe that home prices will remain under downward pressure through yearend, and it will take time to work off the current inventory overhang," he added.

The census report follows the existing home sales index from the National Association of Realtors on Wednesday, which fell by 2.2%, more than anticipated, to a pace of 4.91 million sales.

By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008