New home sales and prices both drop in May

6/25/2008

WASHINGTON Sales of new homes tumbled for the sixth time in seven months in May while median prices kept plunging, underscoring the depth of the nation's housing woes.

The Commerce Department reported Wednesday that new homes were sold at a seasonally adjusted annual rate of 512,000 units in May, down 2.5 percent from the April level. The median price of a new home sold last month fell to $231,000, down 5.7 percent from a year ago.

The report on new home activity in May followed reports Tuesday that showed record home price drops in April, indicating the nation's housing slump is not only deepening but also widening to include previously untouched parts of the country.

The inventory of unsold homes rose to 10.9 months in May, meaning it would take that long to exhaust the current supply of unsold homes. Because of the unusually high inventories, economists believe that home prices will keep falling until the spring of next year.

The prolonged problems in housing have dragged down the overall economy, raising the risks of a full-blown recession.

For May, new home sales were down the most in the West, falling by 11.6 percent. Sales dropped 7.9 percent in the Northeast. But sales posted increases in the Midwest of 5.1 percent and were up 0.4 percent in the South.

In other economic news, orders to factories for big-ticket manufactured goods were basically flat in May after declines of 1 percent in April and 0.2 percent in March. Strength in demand for aircraft and computers was offset by widespread weakness in other categories.

Cliff Waldman, an economist with the Manufacturers Alliance/MAPI, said that business plans to buy new equipment continue to be hampered by the troubles besetting the economy, from housing and credit woes to global inflation, reflected in soaring oil prices.

The Federal Reserve, wrapping up a two-day meeting on Wednesday, is expected to keep interest rates unchanged, capping a series of seven straight rate cuts that it instituted in an effort to keep the country out of a deep recession.

The government on Thursday will issue a revised report on overall economic growth, as measured by the gross domestic product, for the January-March quarter. The expectation is that it will show the GDP expanding at a 1 percent rate in the first quarter, a slight improvement from the 0.9 percent estimate made a month ago.

The reading on durable goods, items expected to last at least three years, showed that strength in May came from a 10.3 percent jump in demand for commercial aircraft and a 14.9 percent increase in orders for military planes and parts. This helped cushion a 3.3 percent decline in orders for motor vehicles. The auto industry is struggling with slumping sales, reflecting the weak economy and soaring gasoline prices, which have dampened demand for sport utility vehicles and other gas-guzzling vehicles.

Total orders in the transportation sector were up 2.6 percent as the strength in airplanes offset the weakness in autos.

Excluding the volatile transportation sector, orders for durable goods fell 0.9 percent, reflecting weakness in a number of areas outside of transportation. This drop was slightly worse than expected and was the biggest decline for these categories in three months.

Orders for primary metals such as steel dropped by 1.3 percent, while demand for machinery was down 5.3 percent. Demand for computer equipment rose by 10.1 percent, while orders for communication equipment were up by 2.4 percent.

Orders for non-defense capital goods excluding aircraft, considered a good proxy for business investment plans, fell by 0.8 percent in May after having posted a big 3.1 percent rise in April.