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New-Home Sales Rose More Than Expected in September

Sales of new homes rose in September after four straight monthly declines, largely because builders cut their prices.

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The Commerce Department said Wednesday that sales rose 5.7 percent last month to a seasonally adjusted annual rate of 313,000 homes. Still, that's less than half the 700,000 that economists say must be sold to sustain a healthy housing market.

A big reason for the gain was that the median sales price fell 3.1 percent to $204,400 — the lowest since October 2010. The number of new homes on the market was also unchanged at 163,000, a record low.

Sales of new homes fell for four straight months before September and hit a six-month low in August.

March through August is typically the peak buying season. But this year, Americans bought fewer new homes in that stretch than in any other six-month period on records going back to 1963.

The economy remains weak two years after the recession officially ended and the unemploymentrate has been near 9 percent since then.

For many, buying a home is too big a risk, even with mortgage rates near historic lows. Others can't qualify for loans or meet higher down payment requirements.

While new homes represent less than one-fifth of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

Last year was also the fifth straight year that sales of have fallen. It followed five straight years of record highs, when housing was booming.

Builders are struggling to compete with foreclosures and short sales — when lenders accept less for a house than a mortgage is worth. Those homes are selling at an average discount of 20 percent, and they are lowering neighboring home values. That's made many re-sales a bargain compared with new homes, creating an average 30 percent disparity in prices.

Home builders started projects in September at the fastest pace in 17 months, a hopeful sign for the economy. But most of the gain was driven by a surge in volatile apartment construction, a sign that many are choosing to rent rather than own a home.

Single-family home construction, which represents nearly 70 percent of homes built, rose only slightly. And building permits, a gauge of future construction, fell to a five-month low.

All home sales remain weak. The number of Americans who bought previously occupied homes fell in September and home sales are on pace to match last year's dismal figures — the worst in 13 years. With three months left to go in 2011, roughly 4.91 million homes are expected to be sold this year. Economists say roughly 6 million older homes need to be sold each year to sustain a healthy housing market.

Home prices have dropped more since the recession started, on a percentage basis, than during the Great Depression of the 1930s. It took 19 years for prices to fully recover after the Depression.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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