New Home Sales Drop 3.6%

Sales of new homes dropped unexpectedly last month as the effects of a soon-to-expire tax credit for first-time owners started to wane.

The Commerce Department said Wednesday that sales fell 3.6 percent to a seasonally adjusted annual rate of 402,000 from a downwardly revised 417,000 in August. Economists surveyed by Thomson Reuters had expected a pace of 440,000.

It was the first decline since March. Sales in September were down 7.8 percent from a year ago.

The median sales price of $204,800 was off 9.1 percent from $225,200 a year earlier, but up 2.5 percent from August's level of $199,900.

The drop in sales was driven by a nearly 11 percent decline in the West and a 10 percent drop in the South. Sales rose 35 percent in the Midwest and were unchanged in the Northeast.

The data reflect contracts to buy homes, not completed sales. Many new homes are sold while they are still under construction, and buyers may be worried that they won't be able to complete the deal before the Nov. 30 deadline to take advantage of a tax credit of up to $8,000 for first-time buyers.

Congress is considering extending the tax credit through March 31 and gradually phasing it out over the rest of next year.

"If they don't extend it, then I think the pullback could be quite significant," said Brad Hunter, chief economist with Metrostudy, a real estate research firm.

Even builders of more upscale homes have felt the impact of the looming deadline. That's because those move-up buyers will have trouble selling their homes without the incentive of the credit.

"The fact that the first-time homebuyer tax credit runs out is hurting," said Bob Mitchell, chief executive of Rockville, Md.-based builder Mitchell & Best, who has gone from selling 80 to 100 homes annually to around 30 this year. Still, he noted, "we're at least selling something."

There were 251,000 new homes for sale at the end of September, down 3.8 percent from August and the lowest inventory in nearly 17 years. At the current sales pace, that represents 7.5 months of supply.