msnbc.com news services
updated 6/25/2008 11:59:39 AM ET 2008-06-25T15:59:39

Sales and prices of new homes fell again in May, the government reported Wednesday, underscoring the depth of the nation’s housing woes.

Major Market Indices

New homes were sold at a seasonally adjusted annual rate of 512,000 units in May, down 2.5 percent from the April level and 40 percent from a year ago. The median price of a new home sold last month fell to $231,000, down 5.7 percent from last month. The figure was down 26 percent from a year ago, when the median price of a new home was $311,300.

The report on new home activity in May followed reports Tuesday that showed record home price drops in April, indicating the nation’s housing slump is not only deepening but also widening to include previously untouched parts of the country.

The inventory of unsold homes rose to 10.9 months in May, meaning it would take that long to exhaust the current supply of unsold homes. Because of the unusually high inventories, economists believe that home prices are likely to continue falling until the spring of next year.

The prolonged problems in housing have dragged down the overall economy, raising the risks of a full-blown recession.

The decline in new-home sales was roughly in line with expectations and was unlikely to affect Federal Reserve policymakers who were completing a two-day meeting. The Fed is expected  to keep interest rates unchanged, capping a series of seven straight rate cuts that it instituted in an effort to keep the country out of a deep recession.

Michelle Meyer, an economist at Lehman Bros., said she expected sales to decline another 10 percent before bottoming out "at a depressed pace" this summer.

"The recovery is likely to be feeble as many potential homeowners remain on the sidelines in anticipation of lower home prices and disheartened by the uncertain economic environment," she said in a note.

For May, new home sales were down the most in the West, falling by 11.6 percent. Sales dropped 7.9 percent in the Northeast. But sales posted increases in the Midwest of 5.1 percent and were up 0.4 percent in the South.

Video: Home sales fall In other economic news, orders to factories for big-ticket manufactured goods were basically flat in May after declines of 1 percent in April and 0.2 percent in March. Strength in demand for aircraft and computers was offset by widespread weakness in other categories.

Cliff Waldman, an economist with the Manufacturers Alliance/MAPI, said that business plans to buy new equipment continue to be hampered by the troubles besetting the economy, from housing and credit woes to global inflation, reflected in soaring oil prices.

The government on Thursday will issue a revised report on overall economic growth, as measured by the gross domestic product, for the January-March quarter. The expectation is that it will show the GDP expanding at a 1 percent rate in the first quarter, a slight improvement from the 0.9 percent estimate made a month ago.

The Associated Press and Reuters contributed to this report.

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