WASHINGTON (AP) – New home sales plunged in 2007 by the largest amount on record while home prices tumbled sharply in December. Analysts forecast more trouble in 2008 as housing tries to emerge from its worst slump in more than two decades.
The Commerce Department reported Monday that sales of new homes dropped by 26.4 percent last year to 774,000. That marked the biggest decline on record, surpassing the old mark of a 23.1 percent plunge in 1980.
The government reported that the median price of a new home barely budged last year, edging up a slight 0.2 percent to $246,900, the poorest showing since prices fell by 2.4 percent during the 1991 housing downturn.
And the slump in sales and prices appeared to be worsening at year's end. December sales fell by 4.7 percent, a bigger-than-expected drop, while the median price of a home fell by 10.4 percent last month, when compared to December 2006, the biggest 12-month decline in 37 years.
"It looks like the floor fell out of the housing market in December," said Mark Zandi, chief economist at Moody's Economy.com. He said the current slump is already on par with the deep housing downturn of the 1980s and could end up being the worst in the post-World War II period.
The data on new homes followed earlier reports that sales of existing homes dropped 13 percent last year, the biggest decline since 1982, while construction of new homes and apartments fell by 24.8 percent, the largest drop since 1980.
Zandi predicted that sales of new and existing homes will likely hit bottom this spring and that construction will level off by this summer. But he said prices were likely to keep falling for the entire year as weak demand forces sellers to cut asking prices even further to move homes.
Housing is slumping now after a five-year boom. Demand for both new and existing homes hit all-time highs for five straight years, ending in 2005, the peak of the boom. New home sales fell by 18.1 percent in 2006. The sales level last month is now down by 56.5 percent from the monthly peak hit in July 2005.
The prolonged slump in housing is raising concerns that the weakness could be severe enough to push the country into a full-blown recession. In an effort to guard against that threat, the Federal Reserve cut a key interest rate last week by the largest amount in more than two decades with a further rate cut expected on Wednesday when the Fed completes a two-day meeting.
The bad news on housing actually gave a lift to Wall Street with investors believing it raised the chances the Fed will cut rates again this week. The Dow Jones industrial average rose 176.72 points Monday to close at 12,383.89.
President Bush and House leaders reached agreement on a $150 billion economic stimulus package last week which included items to boost housing by increasing the size of the mortgages that Fannie Mae and Freddie Mac and the Federal Housing Administration can handle. But critics said the continued plunge in housing showed that more dramatic action is needed.
"The worst housing market in 20 years has led us to the brink of a recession and I remain convinced that we need to address the housing mess as we continue discussions on an economic stimulus," said Sen. Charles Schumer, D-N.Y.
Hillary Rodham Clinton, a Democratic presidential candidate, said the weakness in housing prices was increasing economic anxiety in the country and showed the need for her housing proposals, including providing $30 billion to states and communities to combat mortgage foreclosures.
"The latest housing data shows that 2007 marked the first time in recent history where America has experienced a sustained annual drop in median existing home prices," the New York senator said in a statement. "In order for us to truly jump-start our economy, we must address the housing crisis."
Jerry Howard, the chief executive officer of the National Association of Home Builders, said policymakers needed to offer greater relief, including raising the loan limits for Fannie and Freddie for two years instead of just one.
The 26.4 percent drop in sales for 2007 represented weakness in every part of the country except the Northeast, where sales posted a small 1.6 percent advance. Sales recorded declines of 32.2 percent in the West, 26.7 percent in the Midwest and 26.3 percent in the South.
It would take 9.6 months to eliminate the backlog of unsold new homes at the December sales pace, the longest stretch of time since the month's supply stood at 10.3 months in October 1981.
The severe credit crunch that hit in August has made the troubles in housing worse because it has prompted banks and other lenders to tighten their standards, making it harder for prospective buyers to qualify for loans. Also adding to the problems facing prospective sellers is the rising tide of mortgage defaults, which are dumping more homes on an already glutted market.
"We are seeing the compounding effects of rising subprime mortgage defaults, a weakening real economy and housing market credit restraints," said Stuart Hoffman, chief economist at PNC Bank Corp.
Hoffman said all of the weaknesses in housing will likely convince the Fed to follow-up last week's 0.75 percentage point rate cut with a half-point cut on Wednesday.