Housing's Pain Not Easing

Sales data suggest the market isn't bottoming, raising questions about how the economy will hold up.
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Updated from 10:40 a.m. EST

The latest new-home sales data show that the U.S. housing market remains in a funk and has probably not yet bottomed.

Sales of new homes climbed 1.7% sequentially in October, but that rise came from sharply downwardly revised levels the previous month. The report also showed that inventories remain at high levels; this will put pressure on home prices, as builders resort to discounts to clear homes.

New-home sales were at a seasonally adjusted annual rate of 728,000 in October, the Census Bureau said Thursday. While that's up from a rate of 716,000 homes the prior month, it marks a 23.5% plunge from the rate a year ago.

Moreover, the September figures were lowered significantly, affecting comparisons in October. Previously, the government estimated a sales rate of 777,000 units in September.

The October figures were below economists' expectation for a rate of 750,000 homes, according to

Reuters

.

"We would not be willing to call September the bottom in sales despite the increase; sales still have room to fall this year," Wachovia economic analyst Adam York said in a research report.

With housing shows no signs of improving, the question becomes whether the economy has already felt the brunt of the slowdown or whether more danger looms. Joseph Lavorgna, chief U.S. economist with Deutsche Bank Securities, continues to be in the camp that expects the country to avoid a recession.

Lavorgna, speaking at a real estate conference in New York City on Thursday, said most of the direct hit from housing has already been felt, at least in terms of its drag on economic growth. His comments came before Thursday's government report on third-quarter gross domestic product was revised upward to 4.9%.

Lavorgna expects housing to bottom by the second quarter of 2008. He also argued that the approximate $400 billion of resets in adjustable-rate mortgages next year will hurt banks but will not affect household consumption.

Assume the average rate reset is 500 basis points, he argues, and that amounts to $20 billion of increased payments, which is just a blip in the $10 trillion of annual U.S. personal consumption expenditures.

Rate resets have hit homeowners particularly hard as falling housing prices cut into home equity. The median sales price of a new home in October dropped to $217,800 from $238,000 in September, the Census Bureau report said.

The data showed roughly 516,000 new houses for sales at the end of October, representing a supply of 8.5 months at the current sales pace. In September, there was an 8.3-month supply.

While this is the second straight month of improvement in inventory levels, inventory remains extremely high, York said in his note.

"Inventories will continue to weigh on sales into 2008," York said. "The troubling half ofthe story is the percentage of new homes completed in inventory -- reaching their highest level since the last recession. This will pressure builders to sell homes."

Homebuilders fell on the report.

WCI Communities

(WCI)

tumbled 7.3% to $3.07,

Hovnanian

(HOV) - Get Report

was down 4.1% to $7.31, and

Lennar

(LEN) - Get Report

fell 3.3% to $14.57.

On Wednesday, the National Association of Realtors

reported a worse-than-expected 1.2% month-over-month drop in existing-home sales. The median price of an existing home slid 5.1% from a year earlier, while inventories swelled to 10.8 months of supply.

Existing-home sales, which make up a much bigger portion of the real estate market, are based on sale closings, while new-home sales are based on contracts signed. The new-home sales don't take into effect cancellations, which are soaring amid the housing slump, so the data can be skewed.