U.S. Economy: New-Home Sales Decline 8.3 Percent (Update4)

By Joe Richter

Sept. 27 (Bloomberg) -- Sales of new homes in the U.S. dropped more than forecast in August and prices plunged by the most since 1970, underscoring the Federal Reserve's concern about the broader economy.

Purchases declined 8.3 percent to an annual pace of 795,000, the lowest level in more than seven years, the Commerce Department said today in Washington. The median price dropped 7.5 percent from a year ago.

The figures suggest home construction will extend its deepest slump since 1991, and consumers will have less home equity to tap for spending. Fannie Mae Chief Executive Officer Daniel Mudd said in an interview today that the industry won't hit a bottom until the end of next year, echoing comments by KB Home, the builder that hours earlier reported a third-quarter loss.

``The housing market is not looking good for the months ahead,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland. ``We're likely to see an intensification of the impact housing has on growth.''

Economists forecast sales would fall to an 825,000 pace from a previously reported 870,000 in July, based on the median estimate of forecasts in a Bloomberg News survey. Compared with a year earlier, purchases were down 21 percent.

Summers on Recession

The severity of the slump poses a risk that housing woes will spill over into the broader economy. Former Treasury Secretary Lawrence Summers said there is nearly an even chance the U.S. will fall into recession after almost six years of growth.

The chance of a contraction ``is not quite 50 percent, but somewhere in that neighborhood,'' Summers, now a professor at Harvard University in Cambridge, Massachusetts, said in an interview today.

The economy grew in the second quarter at a revised 3.8 percent annual pace, the most in more than a year, a separate Commerce Department report today showed. The gain compares with a previous estimate of 4 percent and a 0.6 percent increase in the first three months of the year. The figures didn't reflect last month's credit-market turmoil, which heightened concern the expansion might be cut short.

In another report, the number of workers filing first-time jobless claims unexpectedly fell last week to a four-month low of 298,000. The Labor Department figures may help allay concerns about a weakening labor market.

`Weaker From Here'

``The jobs environment has up until now been better than people think, but I think it's going to get weaker from here,'' David Malpass, chief economist at Bear Stearns & Co. in New York, said in an interview.

Treasury notes rose after the housing report, and later extended gains. The yield on the benchmark 10-year note dropped to 4.56 percent as of 5:15 p.m. in New York, from 4.62 percent late yesterday. Stocks rose, with the Dow Jones Industrial Average at 13,912.94, up almost 35 points.

The number of homes for sale at the end of the month fell 1.5 percent to 529,000. The inventory of unsold homes jumped to 8.2 months at the current sales pace.

The number of properties completed and waiting to be sold rose by 2,000 to 180,000.

``We don't think we hit a bottom until the end of '08 and then we have some period of time to work our way back up again,'' Mudd said in the interview in Washington. Fannie Mae is the largest provider of financing for American mortgages.

Regional Breakdown

Sales fell in two of four regions. The decline was led by a 21 percent slump in the West and a 15 percent drop in the South. Purchases increased 42 percent in the Northeast and 21 percent in the Midwest.

Other housing reports already showed the market had weakened. Sales of previously owned homes fell in August to a five-year low, the National Association of Realtors said earlier this week.

Existing homes account for about 85 percent of the market and new homes make up the rest. New-home purchases are calculated based on contract signings rather than closings and are considered a more timely indicator.

A jump in defaults among subprime borrowers, or those with little or poor credit histories, led to stricter lending requirements and made it tougher for Americans to borrow.

Losing Confidence

Waning demand and a rise in cancellations caused builders to lose confidence and scale back projects. An index of builder sentiment this month matched a record low.

Companies including Red Bank, New Jersey-based Hovnanian Enterprises Inc. have increased incentives to work down inventories that swelled as sales slowed.

``We see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins, Jeffrey Mezger, chief executive officer of Los Angeles-based KB Home, said today in a statement. ``The oversupply of unsold new and resale homes and downward pressure on new-home values has worsened in many of our markets.''

KB Home today reported a third-quarter loss on lower sales and $690 million in expenses to write down real estate.

Price declines have raised concerns that consumer spending will slow as fewer Americans apply for home-equity loans.

Masco Corp., the Taylor, Michigan-based maker of Behr paint and Delta faucets, last week cut its full-year earnings forecast because of the housing recession.

The Fed on Sept. 18 lowered its benchmark interest rate for the first time in four years. ``The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally,'' policy makers said in announcing their decision.

The economy will grow 2 percent this year, the least since 2002, according to the median estimate of economists surveyed by Bloomberg News earlier this month.

Consumer spending will probably grow at a 2.25 percent average annual pace in the second half of 2007, compared with a 2.55 percent rate from January through June, the survey also showed. Quarterly gains averaged 3.7 percent in the last decade.

Last Updated: September 27, 2007 17:28 EDT