May 26, 2004

NEW YORK (CNN/Money) - New home sales posted the biggest monthly drop in 10 years in April, coming in much weaker than Wall Street economists had expected.

The Commerce Department said new home sales fell to an annual rate of 1.09 million last month, down 11.8 percent from the revised record high rate of nearly 1.24 million in March, when mortgage rates were near a 40-year low.

Economists surveyed by Briefing.com had forecast that sales would fall to an annual rate of about 1.2 million.

"This is a sign that the housing market is not exempt from the laws of gravity," said Anthony Chan, chief economist for Banc One Investment Advisors.

"Several times in the last year we've seen mortgage rates creeping up and housing hasn't responded. Now the Federal Reserve has put some credibility behind the increase in rates. I think it set a general tone for the housing market that it'll be a lot more muted."

He projected new home sales for the year will be little changed or down slightly.

A separate report Tuesday showed that existing home sales -- by far the lion's share of the nation's housing market -- rose to near record levels last month, bucking forecasts of a modest decline.

But Mark Vitner, senior economist with Wachovia Securities, noted that new home sales are reported when a contract is signed, while existing home sales are reported when the sales closes, usually weeks after a sales agreement is reached. So the new home sales number reflects the impact of rising rates much more quickly.

"With so many folks sensing that interest rates were rising, we probably had some sales pulled from April into March," said Vitner, who sees more strength in the new home market than Chan despite Wednesday's report.

"When all is said and done, we should still have a fairly healthy level of new home sales this year -- probably up 4 to 5 percent for the year."

The drop in new home sales helped take the inventory of new houses up to an estimated 4.3 months supply, the largest since February of 2003.

But it was not enough to hit prices for new homes.

The median price, with half of all new homes costing less and half costing more, jumped 8.8 percent from March to a record $221,200, the department said in its report, while the average price rose 4.9 percent to $270,400, also a record.

Prices are up about 16 percent from April 2003.

An earlier government report showed housing starts slipped in April, but much of that decline came from a drop in construction of apartment buildings, with single-family home starts basically unchanged.

Building permits, a measure of builder's confidence in the market, increased in April.

http://money.cnn.com/2004/05/26/news/economy/newhomes/index.htm?cnn=yes