New-Home Sales Drop Slightly; Builders Point to Foreclosures; Prices Keep Falling

New-home sales were stagnant last month, posting an unexpected decline as builders competed with a glut of foreclosures on the market and prices continued to fall, according to government data released yesterday.

Sales fell 0.6 percent in May to a seasonally adjusted annual rate of 342,000, according to the Commerce Department. That was down 32.8 percent compared with the same period last year.

Analysts have been looking for signs of firming in the housing market and expected a 2 percent increase in new-home sales during May. While the decline was unanticipated, some analysts maintained that the new-home market could begin to show signs of recovery later this year.

"Even though sales disappointed expectations for a rebound, demand for new homes is still exhibiting signs of stability, albeit at very low levels," said Michael Feroli, an economist for J.P.Morgan Chase.

Sales increased in the West and Midwest by 1.3 percent and 18.6 percent, respectively, in May. The Northeast saw the biggest increase, 28.6 percent. But that was overshadowed by an 8.5 percent decline in sales in the South, which includes the Washington region.

Builders have already slashed production and lowered prices, important elements to stabilizing sales, analyst said. Now, much depends on whether the labor market begins to steady, so that potential buyers stop fearing job loss, builders said. Another factor will be whether mortgage interest rates retreat from their recent rise.

"If mortgage rates don't keep going up, you could see improvement in home sales" later this year, said Stuart Hoffman, chief economist for PNC Financial Services Group. "If they rise further, it would be spring of 2010 before we see any improvement in sales and construction."

Meanwhile, median new-home prices fell another 3 percent, to $221,600. A logjam of foreclosed homes on the market has been driving down prices throughout the country. For example, existing homes saw a 16.8 percent decline in median home prices in May, according to industry data released Tuesday. Prices are likely to tumble for another year before beginning to rebound, analysts said.

The 3 percent decline in new-home prices was moderate compared with data released in recent months. But that likely reflects more sales in higher-priced parts of the country, rather than a fundamental shift in the market, said David Crowe, chief economist for the National Association of Home Builders. "The reports I get from my builders is that they are still very price-competitive, and still reducing prices to sell homes," he said.

Builder efforts to shrink the inventory of new homes on the market showed some success last month, but the backlog is still too big, analysts said. At the current sales rate, it would take 10.2 months to sell all the new homes on the market, according to the Commerce Department data. That is down slightly from the previous month, but about twice the rate in a normal market, Hoffman said. "Inventories are still extremely high, and that continues to put pressure on prices," he said.