Glen Creno
The Arizona Republic

National new-home sales took their worst drop in nearly a decade in February, and early indications are that it also wasn’t a good month for builders in metropolitan Phoenix.

The U.S. 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. February numbers for metro Phoenix’s new-home market will be out early next week and are expected to show a similar, or greater, decline.

“Looking at the preliminary numbers, obviously February was a disappointment compared to last year and year-to-date,” said Valley housing analyst RL Brown, publisher of the Phoenix Housing Market Letter.

Brown had predicted that the first half of this year would be rocky for the local new-home market, which permitted a record number of homes last year despite a late-year slowdown.

Builders now are requesting fewer building permits because they are trying to clear inventories of speculative, or “spec,” homes on which buyers didn’t close, Brown said.

Some buyers waited too long to list their existing homes, thinking those properties would sell quickly, as they did in last year’s selling frenzy. The deadline to close on the new home passed, and the builder took it back.

Brown said the resale market also is being pressured by investors unloading their houses. With more spec homes available on the new-home side and a growing inventory of existing homes for sale, consumers have more options and can be more picky in finding and buying homes.

“The bottom line is it is a market in transition now,” Brown said.

It was the second straight monthly decline in the national new-home figures and much bigger than the small 2 percent dip that Wall Street was expecting. The decline followed news Thursday that sales of previously owned homes actually rose by a stronger-than-expected 5.2 percent last month after five straight monthly declines. Analysts said the trend in both reports pointed to a slowing housing market after five record-setting years.

The slowdown in sales put 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 midpoint where half the homes sold for more and half for less.

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, and 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 say 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.