New home sales fall; some see Fed rate cuts

By Patrick Rucker

WASHINGTON (Reuters) - Sales of new U.S. homes unexpectedly fell in February, hitting their lowest level in nearly seven years, according to a report on Monday that raised concerns the troubled housing sector had not yet hit bottom.

New home sales slid 3.9 percent to an annual rate of 848,000 units, the lowest since June 2000, from a downwardly revised pace of 882,000 in January, the Commerce Department said. Sales for November and December were revised down as well.

It was the second straight monthly decline and the second month in a row that sales had come in lower than anyone on Wall Street had expected. The consensus forecast had looked for sales to rise to a 985,000-unit pace.

"Maybe data down the road reverses this decline, but there are a lot of pessimists in the market out there and a number like this, they can really hang their hat on it," said Joe Francomano, vice president of foreign exchange at Erste Bank of New York.

U.S. stock prices fell as the weak housing report made investors uneasy over the outlook for the economy. At the same time, prices for U.S. government bonds rose and the dollar fell as traders bet the report increased chances the Federal Reserve would cut interest rates by mid-year.

"The drop in sales of new homes in February shows a very weak housing market and suggests that home construction will remain a drag on the economy for much of the year," said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.

The Fed held benchmark overnight borrowing costs steady at 5.25 percent at its policy meeting last week. It also left its future policy options open by dropping an explicit reference to the possibility of pushing rates higher in the future.

A separate report on Monday showed the downtrodden U.S. housing market weighing on investors' spirits. The UBS/Gallup Index of Investor Optimism fell to 78 in March, the lowest level since September, from 90 in February.