New homes sell at slowest pace in 17 years

updated 5:02 p.m. ET Sept. 25, 2008

WASHINGTON - New home sales tumbled in August to the slowest pace in 17 years, while mortgage rates spiked this week, increasing pressure on the new chief executives of Fannie Mae and Freddie Mac to help stabilize the housing market.

New homes sales fell by 11.5 percent in August to a seasonally adjusted annual sales rate of 460,000 units, the slowest sales pace since January 1991, the Commerce Department said Thursday.

The median price slid 5.5 percent to $221,900.

Despite falling home prices, it remains difficult to qualify for a loan, and mortgage rates are on the rise.

The average interest rate for a 30-year, fixed-rate loan this week is 6.09 percent, up from 5.78 percent last week, Freddie Mac said Thursday. That increase boosts the payment on a $200,000 loan, for example, by about $40 a month.

“We have not seen any (mortgage) program changes, no assistance for clients to make anything different,” said Jodi York-Caraballo, owner of Green Valley Mortgage Inc. in Bloomingdale, Ill. “They haven’t eased up on lending restrictions.”

Fannie Mae’s new chief executive, Herbert Allison told lawmakers Thursday that the company is evaluating the higher fees and tighter lending standards that the company put in place over the past year. Fannie and its sibling company, Freddie Mac, were seized by government regulators nearly three weeks ago.

“We are looking at every aspect of our business,” Allison said. “We are examining our underwriting and pricing standards to assure that we strike the right balance between expanding our activities and safeguarding taxpayers.

Freddie Mac’s new CEO, David Moffett said the government intervention is “providing needed confidence” to investors, and noted that the company sold more than $8 billion in mortgage-backed securities over the past 10 days.

Fannie Mae and Freddie Mac are the dominant players in the U.S. mortgage market. While they don’t make loans directly to consumers, they own or guarantee more than $5 trillion in loans, about half of the nation’s total.

The two companies saw their finances deteriorate as an alarming number of homeowners fell behind on their payments and went into foreclosure.

Rather than reassuring investors, the historic government takeover on Sept. 7 spread fear through financial markets about the health of banks and investment firms that may hold even riskier mortgage assets than Fannie and Freddie.

On Capitol Hill, Democrats and Republicans traded barbs about who was to blame for Fannie and Freddie’s woes.

Republicans bemoaned the companies’ lobbying influence in Washington and said they had long pushed efforts to rein in the two companies. Democrats said the companies played a valuable role in supporting home ownership noted that Wall Street banks — not Fannie and Freddie — led a dramatic decline in lending standards.

Those home loans were turned into complex securities that now languish on banks’ books and caused the Bush administration last weekend to propose a $700 billion bailout of the financial industry.

Emerging from a two-hour negotiating session on the plan, Sen. Chris Dodd, D-Conn., said, “We are very confident that we can act expeditiously.”

Dismal economic news is adding to the sense of urgency.

Besides the weak housing report, the government said Thursday that new claims for unemployment benefits shot up last week to the highest level in seven years. Orders to factories for big-ticket manufactured goods fell last month by 4.5 percent, far more than expected.

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