New-Home Sales Lower Than Forecast

Sales of new homes fell in October by the largest amount in three months, a fresh sign of the slowdown in the once-hot housing sector.

New single-family home sales declined 3.2% in October to an annualized rate of 1.004 million units from a downwardly revised rate of 1.037 million in September, the Commerce Department said. Sales were slightly weaker than the 1.050 million that economists were expecting, and fell 25.4% from a year ago.

The figure represented the largest drop since July, when home sales plunged 9.2%.

New-home prices, meanwhile, rose in October, after falling sharply in September.

The median price of a new home sold in October was $248,500, up 1.9% from the same month a year ago, and up 13% from last month (The median price is where half sell for more and half sell for less).

The Commerce Department's take on new home sales in October came a day after a real estate trade group said U.S. existing home sales rose modestly, breaking six months of declines. The National Association of Realtors said home resales rose 0.5% to an annual rate of 6.24 million from a 6.21 million pace in September, bucking expectations for a further slowdown.

Shares of homebuilders edged slightly higher in midday trading, including Toll Brothers , DR Horton , KB Home , Lennar , and Pulte Homes .

The pickup in home resales came on the back of falling prices. The industry group said the median home price dropped 3.5% from year-ago levels, the largest decline since records began in 1968. While that spurred sales, inventories of homes for sale still rose 1.9% from September to 3.85 million units.

New home sales fell in all parts of the country, except for the West, where they went moved higher.

In the Northeast, sales plunged by 39%, the steepest drop since January 1996. In the Midwest, they dropped 5.6% and in the South, they slipped 1.7%. In the West, sales rose 3.2%.

At the current sales pace, it would take 7 months to exhaust the supply of unsold homes. That's up slightly from a supply of 6.7 months for September.

"We are seeing residential construction drop really rapidly relative to sales and that's an indicator that will help us clear inventories over the next year," Steven Wieting, director of economic & market analysis at Citigroup, told CNBC's Morning Call.

The cool down in the once-hot housing market figured prominently in the national economy's 2.2% growth rate logged in the late summer, the slowest since the end of last year.

Builders cut spending on home building at an 18% annual rate, the most in 15 years, the government said in a separate report. That sliced 1.16 percentage points off third-quarter GDP, the most in nearly 25 years.

"The direct impact on GDP growth may lessen over the coming quarters and that’s what we are expecting following these new and existing home sales data," Thomas Higgins, chief economist at Payden & Rygel, told CNBC's Morning Call. "But if we look at the indirect effects, particularly on employment and the drag on employment over the next couple of years, it could be significant."

Higgins anticipate a loss of about 1 million jobs: "That is likely to occur over a period of time just as the run-up in housing occurred over the past decade," he told CNBC. "We are likely to see a drag on housing for at least three or four years.

"If you lose the positive wealth effect from housing – the inability to withdraw equity from homes given that prices are declining - then I think we really need to see faster income growth at this stage in order to drive consumer spending," Higgins added.

Outside the struggling housing sector, other parts of the economy remain in
decent shape, Federal Reserve Chairman Ben Bernanke said in a speech Tuesday.
Consumers and businesses are spending and investing. Employers are hiring and
workers' wages are growing solidly.

Economists don't believe the housing slump will short-circuit the five-year-old
economic expansion and throw the economy into recession.

Bernanke also struck an optimistic tone on this front, but said there is always
the risk of a sharper-than-expected slowdown in the housing sector.

The Fed chief said "the slowing pace of residential construction is likely to be a drag on economic growth into next year." Even though there are signs that the demand for homes is stabilizing, builders still need to work off a bloated inventory of unsold homes and that will take time and further adjustments, he said.