New home prices plunge

Builders slash prices nearly 10 percent, the biggest drop since '70, to move out record glut of completed homes; price cuts spark sales increase.

October 26 2006: 11:08 AM EDT

NEW YORK (CNNMoney.com) -- New home prices took their biggest hit in more than 35 years in September, according to a government report Thursday that was a further sign of builders struggling to move homes under a glut of unsold homes.
Top 10 markets: Where to buy now

The lower prices may have worked, as the annual pace of new home sales increased to 1.08 million last month, according to the Census Bureau report, up 5.3 percent from the August reading of a 1.02 million annual rate, which was revised lower. Economists surveyed by Briefing.com had forecast a reading of 1.05 million, which would have been flat with the initial August reading.
 
But the median price of a new home tumbled 9.7 percent from a year earlier to $217,100. It was the sharpest drop since December 1970, when prices posted an 11.2 percent decline, and was the fourth largest year-over-year decline on record.

The September price slump also marked a 9.3 percent decline from August and a 15.5 percent drop from the record high price of $257,700 posted in April of this year.

In addition, the government's measure of prices doesn't capture all the incentives such as free closing costs that many builders have been offering to boost sales.

The collapse in pricing is likely due to the oversupply of homes on the market, due greatly to the building boom of last year.
The number of completed new homes available for sale at the end of the period rose to a record 157,000. That is up 50,000 homes, or 47 percent, from the supply of completed homes on the market a year earlier.

The median price reflects the point at which half the homes cost more and half cost less. The average price, which typically is higher than the median due to high-priced homes, also fell but only 2.1 percent below year earlier prices to $293,200. But it marked only the third month this year that the average was below the $300,000 benchmark.

A report Wednesday from the National Association of Realtors showed the sharpest year-over-year drop on record for median home prices. While new home sales are a smaller part of the overall real estate market, the new homes number is more closely watched by many economists.
Existing home sales are booked at the time of a sales closing, which typically is a month or two after a sales contract is signed. The new home sales are recorded when the contract is signed, and thus is considered a more forward-looking reading, although one that may miss the weakness caused by reports of increased cancellations of orders by buyers.

New home sales are also seen as important to the supply of homes on the market. Many of the new homes purchased during the boom are believed to have been purchased by investors who are now looking to sell the homes and get out of the softer real estate market.

And new home sales are also an important driver of construction employment, which has become an increasingly key part of the nation's jobs base.
Despite all the recent weakness in housing, there are some signs that the housing slump may be at or near its bottom.

A Census Bureau report earlier this month showed home builders having an unexpected increase in housing starts, and a survey of members by the National Association of Home Builders showed a small improvement in confidence, the first increase in that measure in a year, although those with a negative view of the new home market still outnumbered those with a positive view by a four-to-one margin.

The slowdown in new home building has hurt profits and sales for the nation's home builders, including Pulte Homes (down $0.20 to $32.00, Charts), Centex (down $0.18 to $53.44, Charts) D.R. Horton (up $0.29 to $24.26, Charts), Lennar (up $0.18 to $47.65, Charts), K.B. Home (up $0.17 to $45.78, Charts) and Toll Brothers (down $0.19 to $30.25, Charts).

Wednesday afternoon Pulte, the nation's No. 1 home builder by market value, became the latest to post a sharp drop in earnings. It also cut its sales forecast for the current period far below forecast. Centex also cut its forecasts earlier in the week.