AP
New Home Sales Down Substantially
Thursday July 26, 6:37 pm ET
By Martin Crutsinger, AP Economics Writer
Sales of New Homes Plunge by the Largest Amount in 5 Months, Adding to Wall Street Worries

WASHINGTON (AP) -- Sales of new homes tumbled in June by the largest amount in five months, provoking new worries on Wall Street about how much the prolonged housing slump will hurt the overall economy.

The Commerce Department reported Thursday that sales of new single-family homes dropped by 6.6 percent last month to a seasonally adjusted annual rate of 834,000 units. The decline was more than triple what had been expected and was the largest percentage drop since sales fell by 12.7 percent in January.

The fall in new home sales was the latest piece of evidence this week of housing's troubles. Sales in the much larger existing home market also fell in June, dropping by 3.8 percent to an annual rate of 5.75 million units, the slowest pace in nearly five years. Also this week, Countrywide Financial, one of the largest mortgage lenders, reported a sharp drop in second-quarter profits. The company said rising default rates were spreading from subprime to more conventional mortgages.

All these developments unnerved Wall Street, where concern is growing that the problems with subprime mortgages could mean more widespread credit problems are ahead. The Dow Jones industrial average plunged by 311.50 points to close at 13,473.57. It was the biggest one-day point loss since the Dow fell 416.02 points on Feb. 27, when a drop in China's Shanghai stock market rattled investors.

Asked about market turmoil, Treasury Secretary Henry Paulson said Thursday it showed investors were reassessing the risks involved in credit markets.

"Whenever we have extended periods of good markets and benign economic situations, there is a tendency for laxness," Paulson said in a Bloomberg television interview. "I do believe this is a wake-up call that lenders need to be very careful when they price risks."

Paulson said he expected the market turmoil will be contained because of the overall strength of the economy. But he said it was his job "to be vigilant and be prepared if and when we have a global financial shock."

Private economists, who noted that it was just last week that the Dow Jones industrial topped a record 14,000, said the string of weak housing figures meant a more sober assessment of economic conditions.

"Investors are re-evaluating the depth and extent of the housing and mortgage market downturn," said Mark Zandi, chief economist at Moody's Economy.com. "Instead of ending soon, the housing market downturn is likely to extend through 2008. That is a shift in thinking."

Analysts also blamed increases in mortgage rates in June for pushing sales lower.

"Home builders continue to trim prices and offer large non-price sales incentives, but many prospective home buyers obviously are reluctant to sign on the bottom line," said David Seiders, chief economist at the National Association of Home Builders.

Sales of new homes are now 22.3 percent below where they were a year ago. Analysts said this slide is likely to continue because of spreading mortgage defaults as borrowers are not able to meet higher payments as their adjustable rate mortgages reset at higher rates.

For June the inventory of unsold new homes was unchanged at 537,000 units, still high by historical standards.

The median price of a new home sold last month dropped to $237,900, down by 2.2 percent from a year ago. The median price is the point where half the homes sold for more and half for less.

By region of the country, new home sales fell by 27.1 percent in the Northeast, 22.5 percent in the West and 17.1 percent in the Midwest. Only the South saw an increase in sales, a gain of 7.6 percent.

In other economic news, the Commerce Department said that orders for big-ticket manufactured products increased by 1.4 percent last month, the best showing since a 5.1 percent increase in March, with the strength coming from a big rebound in orders for commercial aircraft. Demand for many other durable goods products actually fell in June.

Even with the slump in housing, the economy is expected to have staged a solid rebound in the April-June quarter, growing at an annual rate of around 3.2 percent, up from the anemic 0.7 percent growth rate in the first three months of the year. The government planned to release the official figure on Friday.

New home sales: http://www.census.gov/newhomesales

Durable goods: http://www.census.gov/m3