(New-home sales article updated with additional commentary and stock-price movement.)

NEW YORK ( TheStreet) -- Sales of newly built homes fell 12.4% in July to a seasonally adjusted all-time low rate of 276,000, the Commerce Department said Wednesday. The figure came in well below expectations for a rate of 334,000 after a revised rate of 315,000 in June, and added to the already dismal outlook for the U.S. housing market following Tuesday's weak existing-home sales data .

July's rate represented a 32.4% decline from year-earlier results, and the weakest month on record. Sales were strongest in the South and weakest in the Northeast.
New Homes

The median sales price for new houses sold in July was $204,000, the report said, while the average selling price was $235,300. There were 210,000 new houses on the market at the end of July. It would take 9.1 months to work through that inventory at the current sales pace.

Stocks in the homebuilder sector seemed to have already priced in the dismal data, especially in light of Tuesday's weaker-than-expected report on new-home sales. The SPDR S&P Homebuilders ( XHB), an exchange-traded fund that tracks the homebuilder sector, closed up 3.2%. The iShares Dow Jones US Home Construction ( ITB) gained 3.1%. NVR ( NVR) rose 1.8%, PulteGroup ( PHM) 3.1%, Ryland ( RYL) 3.6% and M.D.C. Holdings ( MDC) 4.4%.

Shares of Toll Brothers jumped 5.8%. The luxury homebuilder said early Wednesday it returned to profitability for the first time since 2007.

Wednesday's new-home sales data came a day after the National Association of Realtors said existing-home sales plummeted 27.2% in July to a seasonally adjusted annual rate of 3.83 million units. The figure was far worse than the expected rate of 4.72 million units after a downwardly revised rate of 5.26 million in June.

The data sparked a heated debate among readers of TheStreet. Join the discussion here.

>>Existing-Home Sales: Winners & Losers

Even record-low and near-record-low mortgage rates have failed to spark demand for housing in recent months. The average rate on a 30-year fixed mortgages fell to 4.55% in the week ended Aug. 20, the Mortgage Bankers Association said Wednesday. It was the lowest rate since 1990, falling from 4.6% in the prior week.

Mortgage applications rose for the fourth straight week last week, though applications for refinancing once again made up the bulk of growth. Refi applications accounted for 82.4% of all applications last week, up from 81.4% in the prior week.

>> Mortgage Applications Spike on Refi

Sales of existing homes were at the lowest level since the total existing-home sales series launched in 1999, the report said. Single-family homes were at the lowest level since May of 1995, plummeting 27.1% in July to a seasonally adjusted annual rate of 3.37 million, from a pace of 4.62 million in June, and 25.6% below year-earlier levels. Single family homes account for the bulk of all existing home sales.

"The numbers are worse than I thought they would be," ConvergEx Group chief market strategist Nicholas Colas told TheStreet Tuesday. "The threat of a double dip seems to grow with every economic data point."

"The market is trying to parse out two different economic issues with respect to housing data," Colas said. "The first is pretty simple -- housing usually helps lift the economy out of recession" as consumers move and purchase durable goods like furniture and washing machines. Growth in sales of durable goods then helps the economy grow. Without recovery in the housing sector "you have to look somewhere else in the economy for improvement."

Inflationary -- and deflationary -- concerns point to the second issue. Housing represents nearly a quarter of the Bureau of Labor Statistic's Consumer Price Index, which tracks monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

"Even though the way that the BLS calculates housing's contribution to inflation is pretty esoteric, it is hard to see how there will be anything but further housing deflation," Colas said. "That means a good chance of overall deflation, which is what the Fed is trying so hard to avoid."

The housing market has been under tremendous pressure for some time, and demand fell further after the springtime expiration of federal tax credits for homebuyers. Most analysts agree the situation is likely to get worse before it gets better.

>>4 Top Homebuilder Stocks: Life After the Tax Credit

NAR chief economist Lawrence Yun was not quite as pessimistic.

"Thanks to the home buyer tax credit, home values have been stable for the past 18 months despite heavy job losses," he said. "Over the short term, high supply in relation to demand clearly favors buyers. However, given that home values are back in line relative to income, and from very low new-home construction, there is not likely to be any measurable change in home prices going forward."

Even so, he said soft home sales will likely continue for several more months.

"Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired. Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September," he said. "However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.

The housing market saw sales ramp up in March and April as consumers rushed to take advantage of tax credits that offered as much as $8,000 for first-time homebuyers and $6,500 for repeat buyers. Following the expiration of those credits on April 30, the market saw a dramatic decline in demand for the month of May that spilled over into June. Data for July showed a further drop in demand. Lawmakers later extended the deadline to close on a home purchase and still qualify for the tax credit to Sept. 30.

-- Written by Miriam Marcus Reimer in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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