New-home sales plummet in August

Sales of new homes plunged in August from the previous month and prices posted their biggest year-over-year drop in nearly 37 years, the Commerce Department said Thursday, underlining the depth of problems facing the housing sector.

A separate report from the Labor Department showing that new claims for unemployment insurance fell a lower-than-expected 15,000 last week to 298,000 implied that the drag from housing was not spilling into labor markets. Even so, speculation flared that the Federal Reserve would have to cut interest rates further to counter an economic slowdown.

“For the Fed, the question is whether this is worse than they really expected and whether it might well be a reason for them to do more preemptive easing,” economist Pierre Ellis at Decision Economics in New York said of the home sales decline.

Sales of new single-family homes dropped 8.3% last month from July to an annual rate of 795,000 -- the slowest sales pace in seven years. The median sale price fell 7.5% from August 2006 to $225,700, the biggest drop in percentage terms since 1970.

Not only were the home sales figures worse than the 830,000-a-year pace forecast by analysts, but they also largely reflect conditions before mid-August market turmoil set in that has led to stiffer lending standards for future loans.

A third report from the Commerce Department showed that the U.S. economy grew at a downwardly revised but still brisk 3.8% annual rate in the second quarter, a pace that analysts do not expect to be sustained in the second half of the year.

The report on gross domestic product was a final revision of second-quarter performance, marked down from a 4% growth rate published a month ago because imports were stronger than the government had previously estimated.

The home sales report was the most striking one for financial market participants, who said the slow drawdown in inventories of unsold homes meant the drag on overall economic activity might be prolonged.

The Fed cut official interest rates by half a percentage point Sept. 18, aiming to forestall some of the effect of a housing-led credit squeeze, which policymakers fear will take a toll on both U.S. and global expansion.

“Having moved so sharply already, they’re going to want to finish what they’ve started,” Ellis said about the Fed.

The overhang of new homes troubled analysts, who noted that foreclosures are expected to soar in coming months when hundreds of billions of dollars’ worth of adjustable-rate mortgages reset at higher interest rates.

There were 529,000 new homes for sale in August, a 1.5% drop from July. But at August’s slower sales pace, it would take 8.2 months to clear that inventory, up from the 7.6 months reported in July.

“When you look at that inventory number, what’s being added to that is not only homes that were half completed but also the foreclosures that are out there,” said Thomas Leritz, portfolio manager at Argent Capital Management in Clayton, Mo.

Leritz said builders had cut back and would-be buyers who could no longer qualify for mortgages were being shaken out, but he said it might take an additional six to 12 months for the process to work out.

The better-than-expected jobless claims data buoyed hopes that any economic slowdown would be moderate and that the recession talk spurred by a drop in employment in August, the first drop in four years, was overdone.

“It suggests the economy is still doing well outside of housing and it suggests that the bad employment news we got in August will not be repeated in September,” said economist Gary Thayer of A.G. Edwards & Sons Inc. in St. Louis.

The GDP report showed that companies still were spending to expand plants and add new equipment in the second quarter.