The government data on Wednesday followed a report showing a plunge last month in sales of previously owned homes and a continued decline in sentiment among homebuilders, which could bode ill for the broader recovery from the worst U.S. recession since the Great Depression of the 1930s.
New home sales fell 7.6 percent to a 342,000 unit annual rate last month from an upwardly revised 370,000 unit pace in November, the Commerce Department said. It was the second straight month that new home sales had fallen. Markets had expected a 370,000 unit annual pace from November's previously reported 355,000 unit rate.
The figures add to recent evidence that the recovery in the housing market will falter once the fiscal support is removed, said Paul Dales, U.S. economist at Capital Economics in Toronto.
The Federal Reserve on Wednesday gave a cautiously optimistic assessment of the economy as it left U.S. lending rates near zero as expected and repeated its pledge to keep them low for an extended period.
However, the Fed -- the U.S. central bank -- dropped from its policy statement a reference to improvement in the housing market and reiterated plans to end purchases of mortgage-backed securities in March. The program had depressed mortgage rates, contributing to the housing market's healing in recent months.
Investors cheered the Fed's commitment to low borrowing costs and the debut of Apple Inc's iPad, lifting U.S. stocks <.DJI>. Its slightly upbeat view of the economy hoisted the U.S. dollar a six-month high against the euro, while prices for government debt fell.
New home sales for the whole of 2009 slumped 22.9 percent to a record low 374,000 units, the Commerce Department said.
RECOVERY SHOWING FATIGUE
A separate report showed mortgage applications fell for the first time in a month last week as demand for home refinancing loans dropped sharply.
Demand for loans to buy a home also fell, but on a smaller scale, the Mortgage Bankers Association said. Its index of mortgage applications fell 10.9 percent to 513.0 in the week ended January 22.
The housing market recovery is showing some signs of fatigue after a surge in sales as first-time buyers rushed to take advantage of a popular tax credit, which had been scheduled to expire in November.
It has since been expanded and extended until June this year and while analysts expect home sales to pick up as a result, they reckon the pace will not be as strong as witnessed with the initial tax credit.
This report does not totally ruin the notion that housing is recovering, but it does underscore the fragility of that recovery. It's not good news for broader economic growth, said Dana Saporta, an economist at Stone & McCarthy Research in Princeton, New Jersey.
The housing market was the main catalyst of the most painful downturn in 70 years and renewed weakness could hobble the economic recovery. Investment in new homes contributed to growth in the third quarter for the first time since 2005.
New home sales were also losing out to the existing home sales market, with a flood of foreclosures depressing prices, analysts said. Some said the drop in sales last month could not be entirely blamed on the expiry of the original tax credit.
That credit was reinstated in early November, and since new home sales are recorded at the time of contract signing, that should have given buyers who missed the first credit plenty of time to get back into the market in December, if they were so inclined, said Michael Feroli, an economist at JPMorgan in New York.
Despite the slump in sales there were a few bright spots in Wednesday's report. The median sale price for a new home rose 5.2 percent last month from November to $221,300, the highest in seven months and the biggest rise since April 2009. Compared to December 2008, the median sale price fell 3.6 percent.
The number of new homes on the market last month dropped 1.7 percent to 231,000 units, the lowest since April 1971. However, December's weak sales pace left the supply of homes available for sale at 8.1 months' worth, the highest since June 2009, from 7.6 months in November.
(Additional reporting by Julie Haviv in New York, Editing by Chizu Nomiyama)