March 26, 2007 / 2:35 PM / 10 years ago

New home sales fall; some see Fed rate cuts

<p>A home in Hampton Oaks, Georgia, in an undated photo. Sales of new homes unexpectedly fell 3.9 percent in February to the lowest rate in nearly seven years while the number of new homes on the market grew, according to a government report on Monday that showed more signs of weakness in the housing sector.File</p>

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.

Alex Beuzelin, a foreign exchange market analyst with Ruesch International in Washington said the new home sales data "further clouds the economic outlook and provides greater traction to the idea that the Fed's next move will be an interest rate cut."

FOR SALE SIGNS

The sharp sales slowdown led to an increase in the number of homes on the market. At the current sales pace, it would take 8.1 months to clear the inventory of unsold homes, up from 7.3 months in January and the highest rate since January 1991.

The report showed the median sales price of a new home rose 2.8 percent in February to $250,000. But that was still off 0.3 percent from the year-earlier level.

Last week, a real estate trade group reported a stronger-than-expected February for sales of existing homes, which represent 85 percent of the housing market.

The sales pace of previously owned homes rose 3.9 percent last month to a 6.69 million-unit annual rate, the biggest gain since March 2004, the National Association of Realtors said on Friday.

Still, foreclosures among subprime borrowers with damaged credit are likely to boost inventory of homes and "dampen our forecast" for a recovery in the housing sector this year, the chief economist for the industry group said.

The new home sales report showed sales rose only in the West, where they increased 24.6 percent. In the Northeast, new-home sales fell 26.8 percent; they decreased 20 percent in the Midwest and 7 percent in the South.

In a separate report, the Chicago Federal Reserve Bank on Monday said its gauge of the national economy improved in February, boosted mostly by strength in production indicators.

The Chicago Fed's National Activity Index rose to 0.03 in February from an upwardly revised -0.72 in January.

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