By Bob Willis Jan. 27 (Bloomberg) -- Sales of new homes in the U.S. unexpectedly dropped in December, signaling the extension of a government tax credit has yet to shore up demand. Purchases declined 7.6 percent to an annual pace of 342,000, the fewest since March, the Commerce Department said today in Washington. For all of 2009, sales dropped 23 percent to 374,000, the lowest level since records began in 1963. The report comes as Federal Reserve policy makers meet to discuss the direction of interest rates and the pending end of programs aimed at keeping mortgage rates low. A setback in housing, combined with a jobless rate projected to average 10 percent this year, is likely to pressure home prices and builder profits for much of 2010. “While we’re past the bottom in housing, especially in sales and construction, we still have a long road to go,” said Adam York, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who forecast a drop to 349,000. The expected expiration of the tax credit “probably pulled sales out of November and December into earlier months.” Stocks dropped following the report. The Standard & Poor’s 500 Index decreased 0.3 percent to 1,089.2 at 10:30 a.m. in New York. The S&P Supercomposite Homebuilder Index fell 1.6 percent. Less Than Forecast Sales were projected to climb to a 366,000 annual pace from an originally reported 355,000 rate in November, according to the median estimate in a Bloomberg survey of 70 economists. Forecasts ranged from 340,000 to 399,000. The government revised November’s reading to 370,000. A government incentive worth $8,000 to first-time buyers was originally due to expire on Nov. 30, which probably caused demand to swell in prior months, economists said. The Obama administration and Congress extended the credit to cover closings through June 30, and expanded it to include some current owners. Bad weather may have also played a role in depressing December new-home sales, economists said. Last month was the 14th coldest December and 11th wettest in 115 years of record keeping, according to the National Climatic Data Center, in Asheville, North Carolina. “December was a pretty cold month and that probably hurt shopping for homes,” said Wells Fargo’s York. “Winter housing data is notoriously volatile.” Prices Fall The median price of a new house decreased 3.6 percent from December 2008 to $221,300, today’s report from the Commerce Department showed. Inventories continued to drop as builders cut back. The number of homes for sale fell to a seasonally adjusted 231,000, the fewest since April 1971. Because the drop in sales was larger than the decline in inventories, the supply of new homes for at the current sales pace increased to 8.1 months from 7.6. At around 2:15 p.m., Fed Chairman Ben S. Bernanke and fellow central bankers may say they will keep the target rate for overnight bank lending near zero to help nurture the recovery. Bernanke is also battling to win support from Senators considering his nomination to a second term as Fed leader. Policy makers are likely to announce they will stick to the pledge to end the $1.25 trillion program of mortgage-debt purchases by March 31. The plan helped send the rate on 30-year fixed mortgages down to 4.71 percent in early December, the lowest level in Freddie Mac data back to 1972. Existing Homes Sales of existing homes plunged 17 percent in December, the month after the credit was to end. The decline was the biggest since records began in 1968, the National Association of Realtors said two days ago. For all of 2009, existing home sales rose 4.9 percent to 5.16 million, the first gain in four years. New home purchases, while accounting for less than 10 percent of the market, are considered a leading indicator because they are based on contract signings. Sales of previously owned homes, which make up the remainder, are compiled from closings and reflect contracts signed weeks or months earlier. Rising foreclosures and joblessness near a 26-year high will weigh on any housing recovery. A record 3 million U.S. homes will be repossessed by lenders this year as unemployment and depressed home values leave borrowers unable to make mortgage payments or sell, according to a RealtyTrac Inc. forecast on Jan. 14. That compares with 2.82 million foreclosures last year. Job Losses Unemployment is contributing to the jump in foreclosures. The U.S. has lost 7.2 million jobs since the recession began in December 2007, and economists surveyed this month forecast the jobless rate will average 10 percent this year. Lower prices, while helping to stir up demand, are hurting builders’ bottom lines. Record foreclosures have depressed the value of the previously owned homes that compete with new houses, prompting construction firms to also lower prices. Lennar Corp., the third-largest U.S. homebuilder by revenue, reported a 29 percent decline in revenue in the quarter ended Nov. 30 even as profits rose due a tax benefit and cost cuts, the company said Jan. 7. “If you ask most homebuilders what their No. 1 competitor is, they won’t tell you another builder,” said Megan McGrath, a housing analyst with Barclays Capital Inc. in New York. “They’ll say the foreclosure market.” To contact the report on this story: Bob Willis in Washington at bwillis@bloomberg.net

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