Your Economy (No Politics)

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U.S. New Home Sales Unexpectedly Increase in December
Courtney Schlisserman in Washington


Jan. 27 (Bloomberg) -- Sales of new U.S. homes unexpectedly increased in December, capping a fifth straight record year for the industry and suggesting job and income growth are keeping the housing market from withering.

Purchases rose 2.9 percent to a 1.269 million annual rate from November's revised 1.233 million pace, the Commerce Department said today in Washington. A record 1.282 million new homes were sold in 2005, and the median selling price in December of $221,800 was down 3.4 percent from a year earlier.

Sales of homes valued at $500,000 or more fell to the lowest level since June 2004. Recent declines in mortgage rates along with rising employment and income growth will help soften any slowdown in the housing market in 2006, economists said.

``All the hype about the housing market falling apart is exaggerated,'' Tim Rogers, Boston-based chief economist for Briefing.com, an economic research firm, said in an interview. ``Mortgage rates are around 6 percent and that's going to keep supporting housing. It's falling off of record highs but I don't think anything is plunging here.''

Economists expected new home sales to fall to a 1.225 million rate from November's originally reported 1.245 million, according to the median of 62 forecasts in a Bloomberg News survey. Estimates ranged from 1.150 million to 1.275 million.

Homes for Sale

The number of homes for sale at the end of the month rose to a record 516,000 in December from November's 504,000. That left the supply of new homes on the market at 4.9 months' worth.

For the year, the median sales price rose 7.4 percent to $237,300 from $221,000. Higher prices are putting home purchases out of the reach of more Americans and will probably lead to a slowdown in sales of both new and existing homes in 2006, economists and industry groups said.

Today's report ``won't mean we're on an uptrend because the monthly numbers are notoriously volatile,'' Gina Martin, an economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. ``We're slowly working our way downward.''

Sales of existing homes fell a greater-than-expected 5.7 percent in December, the National Association of Realtors said on Jan. 25. The increase in the median price of an existing home in December was 10.5 percent, the smallest year-over-year gain since March, the group said.

Lower sales and prices would help ``alleviate some of the concern about housing market froth,'' said Dean Maki, chief U.S. economist at Barclays Capital in New York. ``If the housing market were to continue to generate double-digit house price gains, it's unlikely economic growth would return to a trend-like pace.''

Economic Growth Slows

The U.S. economy grew at a slower-than-expected 1.1 percent pace in the fourth quarter as consumers spent at the slowest pace since 2001 and businesses limited equipment purchases, the government also reported today.

A Bloomberg/Los Angeles Times poll showed most Americans expect no improvement in the economy in the first half of this year. The poll showed Americans disapprove of the way President George W. Bush is handling the economy by a margin of 59 percent to 37 percent. About six out of 10 people say the economy will stay the same in the next six months, while more say it will worsen than say it will improve.

Home sales rose in two of four regions. They increased 11 percent in the West and 23 percent in the Midwest. Sales fell 2.6 percent in the South and 23 percent in the Northeast.

Federal Reserve

Federal Reserve policy makers probably will raise the benchmark interest rate for a 14th consecutive time on Jan. 31, to 4.5 percent from 4.25 percent, according to a Bloomberg survey of economists.

The housing market will slow gradually at the same time business spending on new equipment helps pick up the slack to keep the economy growing, Federal Reserve Bank of St. Louis President William Poole said in an interview on Jan. 20. The National Association of Realtors and Freddie Mac expect sales to slow this year from a record in 2005.

``I would not expect any precipitous decline in housing,'' Poole said, citing continued low real interest rates. ``I would expect it to just be leveling off and you would see new sources of growth from business fixed investment.''

Even with price increases slowing, housing affordability is diminishing. Affordability fell for a second straight month in November, according to a report earlier this month from the National Association of Realtors. The group will report on December affordability on Jan. 30.

Mortgage Applications

Mortgage applications to purchase homes fell in the second half of last year. As of last week, the Mortgage Bankers Association's index of purchase applications had fallen 11 percent from the 12-month high reached in June.

The average rate on a 30-year fixed mortgage was 6.27 percent last month, according to Freddie Mac, the No. 2 purchaser of home loans. While that was down from November's 6.33 percent, it was higher than a year earlier.

``The market is returning to normalcy and the correction is both healthy and necessary,'' Ara Hovnanian, chief executive of Hovnanian Enterprises Inc., said in an interview yesterday. Hovnanian is New Jersey's largest builder.

The number of contracts signed for Hovnanian homes was up 38 percent in the fiscal fourth quarter from the same period a year earlier, the company, the ninth biggest homebuilder by stock market value, said in a report last month. Mortgage rates could gradually go up to 7.5 percent and ``we'd be fine,'' Hovnanian said in the interview.

New home sales make up about 15 percent of the housing market and are counted when a contract is signed. Resales of existing homes make up the rest of the market and are counted when an agreement is closed.

2006 Outlook

Home purchases probably will fall to the second-highest level on record this year, according to the National Association of Realtors. The National Association of Home Builders and the Mortgage Bankers Association are expecting similar declines in the market.

``A lot of demand has been met over the last five years, and a modest rise in mortgage interest rates is causing some market cooling,'' David Lereah, chief economist at the National Association of Realtors said in a statement on Jan. 10.

Centex Corp., the fourth-largest U.S. homebuilder, said on Jan. 24 that orders for homes in its fiscal third quarter advanced 4 percent, the slowest pace in more than three years.

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