New home sales drop 5.3% in October

The latest new home sales figures for October have been released. Here is what they showed:

* New home sales dropped 5.3% to a seasonally adjusted annual rate of 433,000 from a downwardly revised 457,000 in September (originally reported as 464,000). That was slightly worse than the forecast for a reading of 441,000, and the lowest sales rate since January 1991.

* The raw supply of homes for sale continues to decline due to aggressive cutbacks in home construction. It shrank 8% to 381,000 from 414,000 in September. But because sales declined as well, the months supply at current sales pace indicator of inventory swelled to 11.1 from 10.9 in September. That's just shy of the 11.4 month peak set in August.

* The median price of a new home dropped 7% from a year ago -- to $218,000 from $234,300. That leaves new home prices at the lowest level since September 2004.

October was a disappointing month for the home building industry, as expected. Sales slumped to the lowest level in 17 years, while prices retreated to levels we haven't seen in four years. The one encouraging trend in the new home market -- which we haven't seen repeated in the existing home market yet -- is the decline in housing inventory. The dramatic drop in construction activity has led to a sharp decline in the supply of new homes on the market.

The demand side of the equation remains challenging, with unemployment on the rise and the economy on the decline. But it's possible the market will see a pop as a result of the recent sharp decline in mortgage rates. The Fed's announcement that it would start buying mortgage backed securities has helped drive conventional, 30-year fixed rates into the mid 5s from just over 6%.