New Home Sales Slump

March 26, 2007 — -- When it comes to the world of sticks and bricks -- building new homes to house America's families -- there has been a lot of change in the last year.

When the real estate market was red-hot, builders were breaking ground on new developments at a rapid clip to keep up with buyer interest.

But today, the market has turned. More Americans than ever already own a home and the recent mess in the subprime mortgage market means people who have traditionally rented won't be able to find inexpensive financing if they want to buy.

Those two factors have pushed sales of new homes into a nose dive. The government report which measures sales of new homes has seen a 19 percent drop in sales in the first two months of 2007.

"We know [the new homes market] is headed in the wrong direction and we're not exactly sure how it's all gonna pan out," said David Seiders, chief economist of the National Association of Home Builders. He says the association is working on a downward revision to its forecast for 2007, which had been pointing to a slight recovery by year's end.

Builders have backed off building new homes as the market has cooled. Spending on residential construction has dropped by 13 percent during the past year.

But even with the slowdown in new construction, the market is facing a unique situation: There are more new homes for sale today than there have been for 16 years.

At the current sales pace, the nation has a full 8.1 months worth of homes for sale. Analysts say that level of "oversupply" is going to make it tough for builders to get prices headed higher.

Said Seiders, "If the sales numbers refuse to stabilize soon and show improvement, that then infects everything again from there."

In most situations when there is too much supply of something in the economy, prices start to drop off, stimulating a rush of buyers into the market. But the new home acts a bit differently according to analysts.