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New Home Prices Facing Growing Pressure

By Diana Olick, CNBC Real Estate Reporter

NEW YORK ( CNBC) -- Sales of newly built homes are bouncing around a bottom, but prices are now at the lowest level of the year.

The median price of a new home came in at $212,300 for October, which is up from a year ago, but October of 2010 represented the big fall after the end of the home buyer tax credit.

The fact that October of this year saw the lowest price of the year so far is not good news going forward. What this means for the nation's big builders has the analysts split.

"While we continue to believe prices may fall slightly from current levels, we believe pricing is essentially near its trough, and therefore should result in minimal impairment charges for the builders in 2012," writes Michael Rehaut at JP Morgan.
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"New home prices are still at a 31% premium to existing home prices (vs. 14% historically), and given the high level of existing home inventory, we expect pricing pressure to remain," notes Dan Oppenheim at Credit Suisse.

New home sales are still at half the normal historical levels, and they are in for more fierce competition in 2012, specifically, foreclosures.

Banks are ramping up the repossessions again after year-long delays in the process, and that will mean inventories of distressed properties will rise.

These rock-bottom priced properties may or may not compete with new construction, depending on geographical area, but they will bring overall existing home prices down, and that will do nothing good for consumer confidence.

Inventories of new construction are approaching healthy, at just a 6.3 month supply (far better than that of existing homes at an 8 month supply). In raw numbers, they are actually at a record low of 162,000 (or at least since the data tracking began in 1963). Unfortunately, that's not helping prices in and of itself.

"The bigger picture is that house prices are still being weighed down by the huge number of discounted existing homes coming onto the market," writes Paul Diggle at Capital Economics. "New home sales will also be held back by the weaker pace of economic growth that we are expecting next year. Admittedly, at some point activity in the new homes market will have to rebound to reflect underlying population growth. But that is still a few years away yet."
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