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Sales of new homes plummet

The pace dropped 10.5 percent in February. Economists, who expected a 2 percent drop, also point to a fourth month of falling prices.

By wire services
Published March 25, 2006

New home sales fell faster in February than at any time in nine years while home prices declined for a fourth straight month, raising concerns that the once high-flying housing market could be in for a rougher-than-expected landing.

The Commerce Department reported Friday that sales of new single-family homes dropped an estimated 10.5 percent last month to a seasonally adjusted annual sales pace of 1.08-million homes. Analysts had been expecting a decline of about 2 percent.

The slowdown in sales further depressed home prices. The median, or midpoint, price for new homes fell 1.6 percent in February, to $230,400. It hit a record $243,900 in October.

"The new home market looks like it is starting to stagger," said Joel Naroff, chief economist at Naroff Economic Advisers, a Pennsylvania forecasting firm. "Bubbles do burst, they really do."

A crash in home prices is seen as one of the biggest threats to economic growth. Some analysts are worried that five straight years of record home sales, fueled by the lowest mortgage rates in a generation, spurred a speculative fever in housing similar to the forces that created a bubble in stock prices in the late 1990s.

With mortgage rates being pushed higher by the Federal Reserve's anti-inflation campaign, the worry is that home sales will slow further and put more pressure on prices. In addition, homeowners who stretched to buy homes with adjustable-rate mortgages could be forced into foreclosure if they cannot meet the higher monthly payments associated with higher rates.

But other analysts said they think the February decline overstates the market's weakness. A report Thursday showed that sales of previously owned homes rose by 5.2 percent last month, although that gain came after five straight monthly declines in existing home sales.

David Seiders, chief economist for the National Association of Home Builders, said he thinks sales of new homes will fall about 8 percent this year while home prices will rise about 6 percent.

The nationwide drop in new home sales last month differed markedly by region. February sales fell an estimated 29.4 percent in the West and 6.4 percent in the South. Sales rose in the Midwest and Northeast, up 5.2 percent and 12.7 percent, respectively.

State and local data are not published. Because of the survey's small size, even regional estimates can be unreliable, Commerce Department researchers said.

But many Tampa Bay area real estate agents and builders say local new home sales began slowing this fall, and some think it's because the investors who helped launch the market into the stratosphere the past two years have gone away.

Bob Memoli, owner of Florida Luxury Realty in New Port Richey, said speculators built homes in the Key Vista community of southwest Pasco County with hopes of flipping them at big profits. Many, however, have been left holding the bag, thanks in part to higher interest rates and posthurricane insurance rates.

"My partner and I listed one of them," Memoli said. "It's a beautiful house and priced right, but we just can't move it."

Tarpon Springs housing analyst Marvin Rose also cited the role of speculators.

"The common wisdom is investors are leaving the market - rapidly," he said.

February's national decline in new home sales followed a 5.3 percent fall in January and marked the biggest one-month drop since April 1997.

The slowdown in sales pushed the inventory of unsold homes up to a record 548,000 homes at the end of February. At the February sales pace, it would take 6.3 months to sell all of the homes on the market, up from 5.3 months in January.

Analysts think the growing backlog of unsold homes will add to downward pressure on prices in the months ahead.

In other economic news, the Commerce Department reported that orders to U.S. factories for big-ticket manufactured goods rose by 2.6 percent last month, the biggest gain since November. The strength reflected a 52.5 percent surge in demand for commercial aircraft, which rebounded after a big drop in January.

Outside of the volatile transportation sector, orders fell by 1.3 percent, but economists said the underlying trend for manufacturing remained strong.

Times staff writers James Thorner and Scott Barancik contributed to this report by the Associated Press.

[Last modified March 25, 2006, 01:50:17]