New home prices plunge unexpectedly

updated 7:35 p.m. ET Oct. 26, 2006

WASHINGTON - The median price of a new home plunged in September by the largest amount in more than 35 years, even as the pace of sales rebounded for a second month.

The Commerce Department reported that the median price for a new home sold in September was $217,100, a drop of 9.7 percent from September 2005. It was the lowest median price for a new home since September 2004 and the sharpest year-over-year decline since December 1970. The weakness in new home prices was even sharper than a 2.5 percent fall in the price of existing homes last month, which had been the biggest drop on record.

The price decline for new homes came while the sales pace picked up, rising by 5.3 percent to a seasonally adjusted annual rate 1.075 million homes. It marked the second consecutive increase in sales following three months of declines.

The declines in prices served to underscore the severity of the correction in the once-booming housing market, which had seen sales of both new and existing homes soar to record levels for five consecutive years, propelled by the lowest mortgage rates in more than four decades.

This year, with mortgage rates rising through midsummer, sales have cooled considerably, with housing expected to trim more than a percentage point from overall growth in the last half of the year.

The debate is whether the slowdown will be enough to push the country into an outright recession. The Federal Reserve, recognizing the weakness in housing, halted a two-year string of interest rate increases in August and left rates unchanged for a third straight meeting on Wednesday.

The Fed, however, gave no indication that it planned to start cutting rates because of the weakness in housing, saying it was still concerned that inflation remained too high.

The 5.3 percent rise in new home sales in September followed a 3.8 percent rise in August and was the biggest one-month gain since an 8 percent increase in March. However, sales had fallen for three straight months from May through July.

The rise in sales last month was led by a 23.9 percent jump in the West. Sales were also up 6.9 percent in the South. However, sales fell by 34.5 percent in the Northeast and were down 6.3 percent in the Midwest.

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