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New Home Sales Plummet

Sales of new homes plunged by the largest amount in nearly nine years in February while the median price of a new home dropped for the fourth straight month, providing fresh evidence that the nation's once-booming housing market is cooling off.

The Commerce Department reported that sales of new single-family homes dropped by 10.5 percent last month to a seasonally adjusted annual sales pace of 1.08 million homes. It was the second straight monthly decline and was much bigger than the small 2 percent dip that Wall Street was expecting.

The drop in new home sales followed news Thursday that sales of previously owned homes actually rose by a stronger-than-expected 5.2 percent last month following five straight monthly declines. Analysts said the trend in both reports pointed to a slowing housing market after five record-setting years.

The National Association of Realtors reported Thursday that that sales of existing single-family homes and condominiums rose by 5.2 percent in February to a seasonally adjusted annual rate of 6.91 million units.

Analysts said the weather-related boost was likely to be short-lived, with sales expected to slow again in coming months as rising mortgage rates further cool the housing market, which has posted record sales levels for five straight years.

"Weather conditions across much of the country were unseasonably mild in January and likely were a factor in higher levels of buyer activity, which boosted sales that closed in February," said David Lereah, chief economist for the Realtors.

The slowdown in new-home sales was putting pressure on prices. The median price of a new home sold last month dropped to $230,400, down by 1.6 percent from January and off 2.9 percent from February 2005. The median is the mid-point where half the homes sold for more and half for less.

In other economic news, orders to U.S. factories for big-ticket manufactured goods rose by 2.6 percent last month, the biggest gain since November, reflected a surge in demand for commercial aircraft. Outside of the volatile transportation sector, orders actually fell by 1.3 percent, but economists said the underlying trend for manufacturing remained strong.

Also, the Labor Department reported that the number of newly laid off Americans filing claims for unemployment benefits fell by a larger-than-expected 11,000 week to 302,000, signaling that the labor market remains healthy.

The 10.5 percent drop in new home sales in February followed a 5.3 percent decline in January and was the biggest drop since a similar 10.5 percent fall in April 1997.

Sales of new homes have fallen in four of the past five months with the sales rate of 1.08 million units the slowest pace since May 2003.

While sales of both new and existing homes climbed to new all-time highs in 2005, the fifth consecutive annual records, analysts believe sales will decline this year as the housing boom slows under the impact of rising mortgage rates.

By sector of the country, sales fell by the largest amount last month in the West, a drop of 29.4 percent. Sales were also down in the South, dropping 6.4 percent. Sales rose in the Northeast by 12.7 percent while sales in the Midwest were up by 5.2 percent.

The slowdown in sales pushed the inventory of unsold homes up to a record of 548,000 at the end of February. At the February sales pace it would take 6.3 months to sell all of the homes on the market, up from 5.3 months in January.

Analysts believe that the growing backlog of unsold homes will start to put more pressure on home sellers to reduce prices in the months ahead.

Economists still believe that housing is likely to see a moderate slowdown this year rather than anything as severe as the bursting of the speculative bubble in stock prices at the beginning of this decade. That decline was severe enough, wiping out trillions of dollars in wealth, that it helped pushed the economy into a recession.

The report on orders for durable goods showed that the strength came from a 52.5 percent surge in demand for commercial aircraft, a rebound after a 70.1 percent drop in January aircraft orders.

Excluding transportation, orders fell by 1.3 percent last month, the weakest showing in this category since last July. But analysts noted that this drop followed strong gains in the non-transportation area in the previous two months, a good signal for future growth.

"The bottom line here is that industry is doing well," said Ian Shepherdson, chief U.S. economist for High Frequency Economics.

While total transportation orders rose by 13.4 percent, that reflected the 52.5 percent rise in civilian aircraft. Demand for military aircraft fell by 16.7 percent.

Orders for motor vehicles dropped by 3.3 percent in February after a 3.2 percent decline in January. American automakers have been struggling with increased foreign competition and sagging demand for sport utility vehicles in the face of rising gasoline prices.

On Wednesday, General Motors Corp. and its major parts supplier, Delphi Corp., announced plans to offer buyouts to more than 125,000 hourly workers under an agreement with the United Auto Workers. Workers are expected to start leaving GM by June 1.

GM wants to eliminate some 30,000 jobs by 2008.

It was one of the largest buyout offers in corporate history, and came as GM sought to deal with massive losses by trimming labor costs. GM has been losing market share to foreign competition.

The 2.6 percent increase in overall orders was the biggest gain since a 5.3 percent rise last November. It left total orders at $215.8 billion last month, an increase of $4.99 billion.

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