Sales of new homes drop to a 7-year low

updated 12:37 p.m. ET Sept. 27, 2007

WASHINGTON - New-homes sales tumbled in August to the lowest level in seven years, a stark sign that the credit crunch is aggravating an already painful housing slump.

Sales of new homes dropped by 8.3 percent in August from July, the Commerce Department reported Thursday, driving down sales to a seasonally adjusted annual rate of 795,000 units. That was the lowest level since June 2000, when sales clocked in at a pace of 793,000.

The home sales report came on the same day that the government reported a relatively brisk business growth rate in revised figures for the second quarter. But the 3.8 percent pace was less than previously estimated and it occurred before the credit crisis and its repercussions across the broad spectrum of the economy had taken hold.

The median sales price in August fell by 7.5 percent from a year earlier to $225,700. That was the biggest drop in percentage terms in nearly 37 years. The median price is the middle point at which half sell for more and half for less. The average sales price dropped by 8 percent in August from a year earlier to $292,000. That was the biggest decline in 17 years.

Sales fell in the South and the West in August compared with July. Sales, however, rose in the Northeast and Midwest.

The new-homes sales report, combined with other recent economic reports showing a sharp drop in demand for big-ticket manufactured goods in August, suggested the economy lost momentum as it headed into the fall.

On Wall Street, investors looked to the weak home sales report as justification for another rate cut by the Federal Reserve. The Dow Jones industrial average was up around 20 points in morning trading.

Another report issued by Commerce showed the economy staged a rebound in the spring before a credit crisis raised new fears about longer-term business health.

The economy's 3.8 percent growth rate in the April-to-June quarter was the strongest showing in just over a year. Although the new reading for the second quarter was slightly less robust than a previous estimate of a 4 percent growth rate, it nonetheless marked a substantial improvement over the feeble 0.6 percent growth rate registered in the prior quarter.

Gross domestic product is the value of all goods and services produced within the United States and is considered the best barometer of the country's economic health.

The increase in the rate of growth, though, is likely to be fleeting. A deepening housing slump and a painful credit crunch since the spring has darkened the mood of individuals and businesses alike. That has led analysts to predict that economic growth has slowed considerably in the quarter that ends Sunday.

The National Association for Business Economics says it believes growth in the third quarter — the period from July through September — slowed to a pace of around 2.4 percent. It predicts the growth rate in the final three months of this year will be around 2.5 percent. Others think growth will turn out to be weaker than those projections.

Fears that the troubled housing market and credit problems could short-circuit the six-year-old economic expansion have shaken Wall Street. The biggest worry is that people and businesses will cut back on their spending and investment, throwing the economy into a tailspin.

Former Federal Reserve chief Alan Greenspan, in an interview with The Associated Press last week, said the odds of a recession are now higher than one-in-three but are still under 50 percent.

MORE FROM REAL ESTATE

Real estate Section Front

Freddie Mac CEO got $19.8 million in '07 Freddie Mac moves toward stock sale Little foreclosure relief seen from housing bill Housing starts at slowest pace in 17 years   Video: When the deputies come to evict Home auctions surge 47 percent since 2003 FBI investigating fraud at failed IndyMac At housing’s bottom, many will be priced out Paulson defends Freddie-Fannie assistance Mortgage mess front page Real estate Section Front   Add Real estate headlines to your news reader: