WASHINGTON – New home sales plunged in 2007 by the largest amount on record while home prices tumbled sharply in December. Analysts forecast more trouble in 2008 as housing tries to emerge from its worst slump in more than two decades.
The Commerce Department reported Monday that sales of new homes dropped by 26.4 percent last year to 774,000. That marked the biggest decline on record, surpassing the old mark of a 23.1 percent plunge in 1980.
The government reported that the median price of a new home barely budged last year, edging up 0.2 percent to $246,900, the poorest showing since prices fell by 2.4 percent during the 1991 downturn.
And the slump in sales and prices appeared to be worsening at year’s end. December sales fell by 4.7 percent, a bigger-than-expected drop, while the median price of a home fell by 10.4 percent last month, when compared to December 2006, the biggest 12-month decline in 37 years.
“It looks like the floor fell out of the housing market in December,” said Mark Zandi, chief economist at Moody’s Economy.com. He said the current slump is on par with the deep downturn of the 1980s and could end up being the worst in the post-World War II period.
The data on new homes followed earlier reports that sales of existing homes dropped 13 percent last year, the biggest decline since 1982, while construction of new homes and apartments fell by 24.8 percent, the largest drop since 1980.
Zandi predicted that sales of new and existing homes will likely hit bottom this spring and that construction will level off by summer. But he said prices were likely to keep falling for the year as weak demand forces sellers to cut asking prices even more.
Housing is slumping now after a five-year boom. Demand for both new and existing homes hit all-time highs for five straight years, ending in 2005, the peak of the boom. New home sales fell by 18.1 percent in 2006. The sales level last month is now down by 56.5 percent from the monthly peak hit in July 2005.
The prolonged slump in housing is raising concerns that the weakness could be severe enough to push the country into a full-blown recession. In an effort to guard against that threat, the Federal Reserve cut a key interest rate last week by the largest amount in more than two decades with a further rate cut expected Wednesday when the Fed end a two-day meeting.
The bad news on housing actually gave a lift to Wall Street with investors believing it raised the chances the Fed will cut rates again this week. It would take 9.6 months to eliminate the backlog of unsold new homes at the December sales pace, the longest stretch of time since the month’s supply stood at 10.3 months in October 1981.