New-home sales take unexpected tumble, dragging down stocks
Thursday, October 29, 2009
Wall Street stumbled Wednesday as unexpected weakness in the housing market and a slide in oil prices weighed on stocks.
After rising for five consecutive months, new-home sales fell 3.6 percent in September from the previous month, to a seasonally adjusted annual rate of 402,000, according to Commerce Department data released Wednesday. Analysts had expected sales to rise. Sales were down 7.8 percent compared with September 2008.
The decline was driven by a slump in the West, where sales fell 11 percent, and a 10 percent drop in the South, which includes the Washington region. Those decreases were partially offset by a spike in activity in the Midwest, where sales jumped 34 percent.
The unexpectedly weak numbers, along with a more than 2 percent dip in oil prices, helped bring down stocks. The Dow Jones industrial average fell 119.48 points, or 1.2 percent, to 9762.69, while the broader Standard & Poor's 500-stock index was down 20.78, or nearly 2 percent, to 1042.63. The tech-heavy Nasdaq composite index took the heaviest losses, sliding 56.48 points, or 2.7 percent, to 2059.61.
The new-home sales data comes after recent stabilization in the housing sector, including an industry report last week that showed a 9 percent jump in sales of previously owned homes in September. New-home sales currently account for about 8 percent of the market, down from 15 percent traditionally, according to the National Association of Home Builders.
The drop in new-home sales last month could be an aberration, reflecting the bumpy nature of the housing recovery at a time of rising unemployment, economists said. Buyers have already made their way through the majority of the cheap new homes on the market, making future sales more difficult, while builders are still competing against a lot of cheap foreclosed properties on the market.
"We don't know yet if it's anything more than a blip," said Steven Ricchiuto, an economist for Mizuho Securities USA.
But it could also reflect the waning impact of an $8,000 tax credit for first-time home buyers, which expires Nov. 30, economists said. Data on new-home sales reflect a signed contract but not a completed sale. And some potential buyers may have been concerned that they would not complete their deal before the tax credit expires, some economists said.
Although it used to take 30 to 45 days to reach settlement on a home purchase, it now often takes two months or longer, said Bernard M. Markstein, a senior economist at the National Association of Home Builders. Securing a loan can be time-consuming, especially if the sales price does not match the appraised value, he said. "Banks are just being more cautious," Markstein said.
There were some positive indicators in the data. The number of new homes for sale fell to 251,000 by the end of September, the lowest inventory level since 1982 and down from about 500,000 in 2006 during the housing boom. Once sales pick up again, builders will be forced to restart construction to fill buyers' demands, economists said.
Also median home prices rose 2.5 percent, to $204,800, compared with August, though they were down 9.1 percent compared with September of last year. If the tax credit is not extended, demand will likely fall and put pressure on prices again, Markstein said. "It will not surprise me to see weakness returning to prices," he said.