WASHINGTON – The number of buyers snapping up new homes dipped unexpectedly last month as the effects of a temporary tax credit for first-time owners started to wear off.

The 3.6 percent drop in September's new home sales, reported by the Commerce Department on Wednesday, was the first decline since March and a distinct sign of weakness in a market that had rebounded strongly over the summer.

The report surprised Wall Street. Stocks fell Wednesday with the Dow Jones industrial average off 36.88 to 9,845.29 in midday trading. Homebuilder stocks also tumbled with Hovnanian Enterprises leading the way with a 9 percent drop, or 38 cents, to $3.92.

On the positive side, however, the government reported that orders to U.S. factories for big-ticket manufactured goods rose 1 percent in September as demand for machinery offset weakness in commercial aircraft and autos.

Analysts expect that the overall economy, as measured by gross domestic production, grew at an annual rate of 3.3 percent in the July-September quarter after contracting for a record four straight quarters. The third-quarter GDP report is due Thursday.

The drop in new home sales could help the lobbying campaign of real estate agents and homebuilders. They want Congress to extend the tax credit of up to $8,000 for first-time buyers.

"Seeing a number like this today, I think a lot of lawmakers will be pounding their fists on the table," said Jennifer Lee, an economist with BMO Capital Markets.

Even builders of more upscale homes that at are out of reach for many first-time buyers have felt the impact of the looming deadline. High-end builders market to move-up buyers who need to sell before they can buy a new house.

"The fact that the first-time homebuyer tax credit runs out is hurting," said Bob Mitchell, chief executive of Rockville, Md.-based builder Mitchell & Best, who has gone from selling 80 to 100 homes annually to around 30 this year. Still, he noted, "we're at least selling something."

Critics, however, say many buyers would have made their purchases anyway and call the credit an unnecessary subsidy for people who don't need it.

New home sales fell to a seasonally adjusted annual rate of 402,000 from a downwardly revised 417,000 in August. Economists surveyed by Thomson Reuters had expected a pace of 440,000.

New home sales, however, are still up 22 percent from the bottom in January, and analysts don't expect them to recede too far.

"We're starting to climb out of a very deep, dark cave," said Adam York, an economist with Wells Fargo Securities. "It's going to be a long process."

The report provides a timely view of the housing market because it reflects signed contracts to buy homes, rather than completed sales. It's taken longer this year to finish deals because of delays in getting approved for a mortgage and having the property appraised.

Sales have begun to slow in Nevada as buyers realize they may already be too late to qualify for the tax credit, said Allen Morris, a senior vice president for Warmington Residential. The tax credit has been the major draw in the builder's Nevada communities, where homes are priced between $150,000 and $225,000.

"We're excited about the prospects of having the tax credit extended," he said.

Sales in September were off 7.8 percent from a year ago and are down more than 70 percent from the peak in July 2005.

The median sales price of $204,800 was off about 9 percent from $225,200 a year earlier, but up 2.5 percent from August's $199,900.

The drop in sales was driven by a nearly 11 percent decline in the West and a 10 percent drop in the South. Sales rose 35 percent in the Midwest and were unchanged in the Northeast.

There were 251,000 new homes for sale at the end of September, down almost 4 percent from August and the lowest inventory in nearly 27 years. At the current sales pace, that represents 7.5 months of supply.

The industry has scaled back production so dramatically that construction will need to keep growing in the coming months, wrote Patrick Newport, an economist with IHS Global Insight. That means, he wrote, that job losses in the homebuilding industry "will soon come to an end."

Source: Associated Press, October 29, 2009