The Commerce Department reported Wednesday that new home sales fell by 2.8 percent last month to a seasonally adjusted annual rate of 588,000 units, the slowest pace since February 1995.
The median price of a new home dropped to $216,000 in January, down 4.3 percent from the December median sales price, the point where half the homes sold for more and half for less. That was the lowest median price since September 2004 and underscored that the steep slide in housing is still under way.
Analysts believe that housing activity has further to fall as a tidal wave of mortgage foreclosures is dumping more unsold homes on an already glutted market. For January, the inventory of unsold homes dropped but since the pace of sales activity slowed as well, the number of months it would take to exhaust the current inventory rose to 9.9 months, the longest period in more than 26 years.
Until this inventory backlog is worked down further, economists are predicting more declines in prices in the months ahead.
The 2.8 percent drop in new home sales in January followed even bigger declines of 4 percent in December and 13.1 in November and represented weakness in every part of the country except the West, which saw sales increase by 2.2 percent.
Sales fell by 10.3 percent in the Northeast and dropped by 7.6 percent in the Midwest and 2.4 percent in the South.
Earlier this week, a real estate trade group reported that sales of existing homes had fallen by 0.4 percent in January, pushing existing home sales down to a seasonally adjusted annual rate of 4.89 million units, the weakest showing on records going back to 1999.
Financial markets, however, were bolstered Wednesday by the announcement that regulators will allow Fannie Mae and Freddie Mac - the biggest sources of financing for U.S. home loans - to lift temporarily the ceilings on the size of mortgages that they will be able to back, thus making more mortgages available to combat the current credit squeeze.
The Dow Jones industrial average finished the day up 9.36 points at 12,694.28, its fourth straight positive close.
Analysts still forecast more home price declines until the inventory levels are worked down further. A rising tide of mortgage foreclosures is pushing even more unsold homes onto the glutted market and financial institutions have tightened lending standards since a credit crisis hit with full force last August, making it harder for prospective buyers to qualify for loans.
"There can be no doubt at all that the housing market is suffering a catastrophic collapse. There is no sign yet that a bottom is near," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, a private forecasting firm.
The weakness in housing has spread to the rest of the economy, raising the prospects the country could fall into a full-blown recession. The country is being battered by the prolonged slump in housing, a serious credit squeeze and soaring energy prices.
In another sign of trouble, the Commerce Department reported Wednesday that orders to U.S. factories for big-ticket manufactured goods plunged in January by the largest amount in five months, an indication that manufacturers are being caught in the weakness engulfing the rest of the economy.
The 5.3 percent drop in new orders last month reflected declines across a wide swath of industry from commercial aircraft and autos to heavy machinery and computers.
A growing number of analysts believe the economy will slip into a recession this quarter although they expect the downturn to be short and mild, thanks to aggressive interest rate cuts from the Federal Reserve and a $168 billion economic stimulus package passed by Congress earlier this month. Millions of households will begin seeing rebate checks in May that should give the economy a boost starting this summer.
The orders weakness was led by a 13.4 percent decrease in orders for transportation equipment, which reflected a 30.5 percent plunge in demand for commercial aircraft and a 0.8 percent fall in demand for motor vehicles and parts.
The report showed that orders for non-defense capital goods excluding aircraft, considered a good proxy for business investment, fell by 1.4 percent last month.
