NEW YORK Champagne corks went back in their bottles on Thursday after a report showed new home sales fell nearly 15 percent in December, deflating long-standing hopes for a housing recovery.
Those hopes were fueled by a report earlier this week of a surprising jump in existing home sales last month.
Not so fast, say some analysts: the sale of cheaper, foreclosed homes made up the bulk of existing houses sold last month and once that glut makes its way through the system, new home sales are expected to stabilize.
Home builders, struggling under sinking demand amid the credit crisis, have faced a flood of homes in foreclosure offered at steep price discounts by banks desperately seeking to unload the properties.
To compete, home builders have curbed new construction and slashed prices at the expense of profits to pay down their debt and stay afloat.
"These foreclosures are continuing to push down home prices, so home builders will probably have to respond with cuts on home prices that are even more aggressive," said Michelle Meyer, an economist at Barclays Capital in New York.
Sales of newly built U.S. single-family homes fell 14.7 percent in December, the largest monthly decline since 1994, a Commerce Department report showed on Thursday.
Sales tumbled to an annual pace of 331,000, the lowest since the department started keeping records in 1963.
Sales have fallen so low that a leveling-off appears inevitable, says Adam York, an economic analyst at Wachovia Corp in Charlotte, North Carolina.
"While I am not willing to call a bottom, I would not be surprised to see new home sales reach a bottom 3 to 4 months from now," he said.
"Mathematically speaking, it just makes sense," he said.
The battered U.S. housing market, both the source and a major casualty of the credit crisis, is critical to the U.S. economy. An improvement should portend a turnaround for the world's largest economy and help staunch losses at U.S. banks, hit hard by soured mortgage securities.
New home sales account for about one-fifth of the housing market. The level of new home sales, however, indicates housing market trends and, in turn, economic momentum and consumer purchases of furniture and appliances.
It is possible that new home sales will bottom out at an annual pace in the low 300,000s, York said.
"In many markets, it now makes more sense to buy rather than rent and while a weak economy may continue to put downward pressure on sales, lower interest rates and talk of further help from Washington may indicate a bottom comes sooner rather than later," he said.
Low mortgage rates should lift demand, especially with spring, the peak home buying season, only months away.
Interest rates on 30-year fixed-rate mortgages averaged 5.10 percent for the week ending January 29, nearly 1 percentage point lower than where they were in late November, according to housing finance company Freddie Mac.
Two weeks earlier, mortgage rates were 4.96 percent, the lowest since Freddie Mac started surveying them in 1971.
The U.S. housing market is in the worst downturn since the Great Depression and its impact has rippled through the recession-hit economy, as well as to the rest of the world.
The new home sales report jives with separate data last week on December housing starts, a measure of initial construction of residential units, which also plunged.
Such extreme lows suggest that housing construction and sales activity could soon hit bottom, according to John Ryding, chief economist, and Conrad DeQuadros, senior economist, at RDQ Economics in New York.
The large fall in new home sales was at odds with the rise in existing home sales. Existing home sales across the United States rose 6.5 percent to an annual rate of 4.74 million units in December from a rate of 4.45 million in November, a National Association of Realtors report showed on Monday.
Home builders have aggressively cut construction, but there is not much more they can do as they are competing against a wave of foreclosures that are being sold at deeply discounted prices, says Barclays' Meyer.
Demand is still falling more quickly than home builders can reduce activity, so there is a growing imbalance between demand and supply in the new home market, she said.
(Additional reporting by Lucia Mutikani in Washington; Editing by Dan Grebler)