New Home Sales Drop by Record Amount

The Commerce Department reported Monday that sales of new homes dropped by 26.4 percent last year to 774,000 — surpassing the old mark of a 23.1 percent plunge in 1980.

The median price of a new home barely budged last year, edging up a slight 0.2 percent to $246,900, the poorest showing since prices fell by 2.4 percent during the 1991 housing downturn, the government reported.

“We are seeing the compounding effects of rising subprime mortgage defaults, a weakening real economy and housing market credit restraints,” Stuart Hoffman, chief economist at PNC Bank Corp, told the Associated Press.

The slump in home sales and prices appeared to worsen at year’s end. December sales fell by 4.7 percent while the median price of a home fell by 10.4 percent, when compared to December 2006, the biggest 12-month decline in 37 years.

“It looks like the floor fell out of the housing market in December,” said Mark Zandi, chief economist at Moody’s He said the current slump is already on par with the deep housing downturn of the 1980s and could end up being the worst since World War II.

Despite the disappointing home sales numbers, Floyd Norris, The New York Times’ chief financial correspondent, said that “investors seem to believe that things are looking up, thanks to the combination of Fed rate cuts and an increase in the size of loans that can be sold to Fannie Mae and Freddie Mac.”

He noted that the S&P Supercomposite Homebuilding Index has jumped “an astonishing 40 percent since it hit bottom Jan. 8, with all of the 15 stocks in the index up at least 11 percent. (The index is still 67 percent below its peak in 2005.)”

Regarding the new housing numbers, Norris pointed out that the northeastern U.S. has the strongest market for new home sales with 65,000 new homes sold last year — a 3 percent increase over 2006. The country’s other three regions were off at least 26 percent, with the west down the most at 32 percent.

“That is the worst annual decline for any region since 1980, when a recession brought on by high interest rates destroyed the market,” Norris wrote in his Times blog on Monday.

The weak housing data will be on the minds of monetary policy-makers when the Federal Reserve begins a two-day meeting on Tuesday to consider whether the listless economy needs another boost from lower interest rates.

Investors expect the Fed to cut the benchmark federal funds rate by at least 25 basis points on Wednesday, just more than a week after it cut rates three-quarters of a percentage point in an emergency move.

With the expected rate cut in mind, the Dow Jones industrial average shrugged off the glum housing news and rose more than 176 points Monday.