February 24, 2016 / 3:04 PM / a year ago

U.S. new home sales tumble; services sector weakens

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Homes are seen for sale in the southwest area of Portland, Oregon March 20, 2014.Steve Dipaola

WASHINGTON (Reuters) - New U.S. single-family home sales tumbled in January from a 10-month high as sales in the West region plunged, but the overall housing market recovery remains intact.

Other data on Wednesday showed the services sector contracted in early February for the first time since October 2013, suggesting a weakening of economic conditions outside the troubled manufacturing and energy industries.

"The reports point to some weakening in underlying economic momentum. That said, we continue to expect the recovery to rebound from the fourth-quarter stumbles, though the outlook beyond the first quarter remains very uncertain," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Commerce Department said single-family home sales dropped 9.2 percent last month to a seasonally adjusted annual rate of 494,000 units, almost unwinding December's sharp increase. Economists had forecast new home sales, which account for 8.3 percent of the housing market, slipping to only a 520,000 unit-rate last month.

Sales in the West, which has seen a steep rise in home prices because of tight inventories, plummeted 32.1 percent to their lowest level since July 2014. The percent decline was the largest since May 2010.

Sales rose 3.4 percent in the Northeast, despite a blizzard in late January. They were also up 1.8 percent in the populous South, but decreased 5.9 percent in the Midwest.

The new home sales data tends to volatile month-to-month because it is drawn from a small sample. As such, economists were not too worried about January's plunge.

"Through some of the noise in the data, it appears that home sales are continuing to trend higher over time off of historically low levels. We maintain our view that the housing market will continue to recover," said Daniel Silver, an economist at JPMorgan in New York.

The PHLX housing index .HGX, including builders, building products and mortgage companies, rose 0.36 percent, outperforming a broadly weaker stock market. The dollar dipped against a basket of currencies, while prices for U.S. Treasury debt rose.

Strong Fundamentals

Roofers work on new homes at a residential construction site in the west side of the Las Vegas Valley in Las Vegas, Nevada April 5, 2013.Steve Marcus

Housing remains supported by a tightening labor market, which is lifting wage growth and bolstering household formation. Reports on Tuesday showed sales of previously owned homes hitting a six-month high in January and house prices rising 5.7 percent in the year to December. While mortgage applications fell last week, they retained half of the prior week's increase.

In a separate report, data firm Markit said its flash U.S. services PMI business activity index fell to 49.8 early this month from a reading of 53.2 in January. A reading below 50 indicates a contraction in services sector activity.

But with respondents also blaming the harsh weather in the Northeast for disrupting activity, the decline in the index probably exaggerates the slowdown in the services sector.

Economists also noted that the Markit survey, which has a short history tracking the U.S. services sector, has previously given false signals on the health of the services industries.

"Obviously a big drop is noteworthy. If nothing else, keep an eye open for other signs of a service slowdown," said Chris Low, chief economist at FTN Financial in New York.

The more established Institute for Supply Management survey showed the services sector expanding in January for the 72nd straight month, though momentum has slowed since November.

A firmer housing market should help to prop up the economy as it navigates rough seas caused by a robust dollar, spending cuts by energy firms hurt by lower oil prices and sluggish global demand. Efforts by businesses to sell off inventory are holding back growth.

These headwinds have undercut manufacturing. The economy grew at a 0.7 percent annual rate in the fourth quarter. Growth estimates for the first quarter are above a 2 percent rate.

Last month, the inventory of new homes on the market increased 2.1 percent to 238,000 units, the highest since October 2009. Still, housing stock remains tight.

At January's sales pace it would take 5.8 months to clear the supply of houses on the market, up from 5.1 months in December. The median price of a new home fell 4.5 percent from a year ago to $278,800.

Reporting by Lucia Mutikani; Editing by Andrea Ricci

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