New-Home Prices Fell in Sept.

By Dina ElBoghdady
Washington Post Staff Writer
Friday, October 27, 2006

Prices of new homes fell last month, turning some lookers into buyers, a government study released yesterday shows.

A report by the Commerce Department found that the median price of a new single-family house in September fell to $217,100. That's down 9.2 percent from August and 9.7 percent from September 2005 -- the largest year-over-year decline since 1970. With prices down, the pace of sales picked up 5.3 percent from August, though it was still 14.2 percent below September 2005.

Many analysts attribute the uptick in sales to aggressive price cuts by builders. "You're seeing builders throw cash on the hood to move their inventory," just as Detroit automakers did when car sales slowed, said Michael Larson, an analyst with Weiss Research Inc. in Florida. "They started by giving out freebies like granite countertops. Now the only way to move product is to cut prices."

The new-home sales figures jibed with data released this week by the National Association of Realtors, which found that the price of existing homes fell 2.2 percent last month, the largest monthly decline since the group began tracking the numbers nearly four decades ago.

The new-home numbers are thought to give a more forward-looking account of the health of the housing market because they are recorded when a contract is signed. Sales figures for existing homes capture closed sales, many of which are for deals that were agreed to months earlier.

Based on yesterday's data, some analysts predict the rush by builders to slash prices will push individual sellers to do the same next year if weakness persists in the housing market.

Typically, individuals capitulate on prices more slowly because they are emotionally attached to their homes, said Greg Gieber, who tracks the housing market for A.G. Edwards & Sons Inc. But if builders continue to cut prices, individuals who do not follow suit will find themselves at a huge disadvantage.

"A lot of housing economists predict that housing prices will continue to decline for another 10 to 12 months," Gieber said. "What the builders are trying to do is to get their stuff out and sold before the worst of the price declines."

But Gieber and other analysts cautioned against reading too much into yesterday's report because its findings are often dramatically revised. It is based on a small sample of homes, it does not control for house sizes, and it does not capture the record levels of contract cancellations, an increasing cause of anxiety for builders.

Cancellations used to hover around 20 percent, said Nishu Sood, an analyst at Deutsche Bank Securities Inc. They jumped to 33 percent in the second quarter and are nearing 40 percent in the third quarter.

If those cancellations were factored into yesterday's data, they most likely would have dragged down sales volume, Sood said.

The West led the rise in September sales with a 23.9 percent increase over August, followed by the South, which includes the Washington area, with a 6.9 percent increase. Sales fell by 34.5 percent in the Northeast and 6.3 percent in the Northwest.

The seasonally adjusted number of homes for sale fell to 557,000, from a peak of 570,000 this summer. Including the cancellations would have probably added to the inventory of unsold new homes in September, Sood said. For builders, an excess of homes is a costly burden.

"The builder has a huge commitment of capital to unsold homes," Sood said. "Each day it does not sell adds to the cost, and that's where the imperative to discount comes from."

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