U.S. Economy: New-Home Sales Tumble to 12-Year Low (Update2)

By Bob Willis


Dec. 28 (Bloomberg) -- Sales of new homes in the U.S. fell to a 12-year low in November, pointing to bigger declines in construction that will hinder economic growth in 2008.

Purchases dropped 9 percent to an annual pace of 647,000 and October sales were revised lower, the Commerce Department said today in Washington. Last month's sales were weaker than the lowest forecast in a Bloomberg News survey of economists.

Treasury notes extended their rally and traders added to bets that the Federal Reserve will cut interest rates again in January to prevent a recession. New-home sales are down 25.4 percent so far this year, heading for the biggest annual decline since at least 1963.

``This gives a dire picture,'' said Dana Saporta, an economist at Dresdner Kleinwort in New York. ``The weak data raise the risk of the economy slowing faster than Fed officials would like.''

A separate report showed the National Association of Purchasing Management-Chicago's index of American business activity rose this month as new orders increased. The group's index climbed to 56.6, from 52.9 the previous month.

The deepest housing recession in 16 years will worsen as discounts fail to lure buyers and mounting foreclosures swell the glut of unsold properties, economists said. Falling property values may cause consumer spending to cool, increasing the odds the expansion will falter in 2008.

``The most important implication of this is it's going to drive down construction outlays and that's a direct effect on GDP,'' said Neal Soss, chief economist at Credit Suisse Group in New York.

Yields Retreat

Treasuries rose. The yield on the benchmark 10-year note fell 12 basis points to 4.08 percent at 4:18 p.m. in New York. The dollar weakened against the euro and stocks ended the day little changed. Standard & Poor's Supercomposite Homebuilding Index, which includes KB Home, Pulte Homes Inc. and D.R. Horton Inc., declined 2.5 percent to 307.2.

A Bloomberg survey of 68 economists forecast sales would fall to an annual pace of 717,000 from a previously reported 728,000 rate in October, according to the median estimate. Economists' forecasts ranged from a low of 685,000 to a high of 750,000. Government records only go back to 1963.

Sales of new homes were down 34 percent from the same time last year, the biggest 12-month drop since January 1991. The median price fell 0.4 percent from November 2006 to $239,100.

Inventories Swell

The number of homes for sale at the end of November decreased 1.8 percent to 505,000, the fewest in two years. Still, because sales dropped even more, the inventory of unsold homes at the current sales pace jumped to 9.3 months from 8.8 months in October.

Purchases fell in three of four regions, led by a 28 percent plunge in the Midwest. Sales dropped 19 percent in the Northeast and 6.4 percent in the South. They rose 4 percent in the West.

The housing recession has deepened since the August turmoil in subprime mortgages led to a worldwide credit shortage. Stricter borrowing standards and a freeze on lending to borrowers with poor credit put mortgages out of reach for more potential buyers. That's driving home prices lower, weakening sales as people hold out for even bigger reductions.

Sales of new houses will probably tumble 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer. Sales of new homes in November were 53 percent down from their July 2005 peak.

Prices Decline

Home prices in 20 metropolitan areas fell 6.1 percent in the 12 months to October, the most in at least six years, according to a report this week by S&P/Case-Shiller. The decline raises the risk that more Americans will walk away from properties that are worth less than they owe, economists said.

Lehman Brothers Holdings Inc. is forecasting prices will fall at least 15 percent from peak to trough. By that measure, the S&P/Case-Shiller index is down 6.6 percent so far.

With sales and prices falling, foreclosures rose 68 percent in November from a year earlier. They may continue surging in 2008 as mortgages for some subprime borrowers with adjustable rates reset.

As foreclosures throw more homes onto the market, homebuilders such as Hovnanian Enterprises Inc., New Jersey's largest, are scaling back.

`Difficult Year'

Hovnanian plans to ``pare down our inventories in virtually all our markets,'' Chief Executive Officer Ara Hovnanian said on a conference call Dec. 19. ``It will be a difficult year.''

Housing starts are near a 14-year low and have fallen 48 percent since their January 2006 peak. Declining home construction has subtracted from economic growth for the last seven quarters, and economists are expecting the drag to continue in 2008.

The weaker housing market is also forecast to undermine consumer spending, which makes up two thirds of the economy, as falling property values leave owners feeling less wealthy and with less equity to tap for extra cash.

The odds of recession have increased since the credit markets froze as a result of the subprime crisis. The economy will expand at a 1 percent annual pace in the fourth quarter after growing at a 4.9 percent rate from July through September, according to the median forecast of economists surveyed this month by Bloomberg News.

``The probability of recession is 50 percent for next year at some point,'' Martin Feldstein, head of the National Bureau of Economic Research, which determines when contractions start and end, said in a Dec. 14 interview. ``We could see a downturn starting sometime in the spring or the second quarter of next year.''