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Drop in New Home Sales Short Detour in Long, Slow Recovery

Yesterday's (Wednesday) report of a drop in new home sales for October briefly sent shudders through a housing market that has appeared on the road to recovery, but experts immediately offered assurances that the bad news was temporary.

"The new-home sales data are volatile and revision-prone and we are not changing our view that a modest recovery in home sales, construction activity, and prices is well under way," John Ryding and Conrad DeQuadros of RDQ Economics said in a research note.

New home sales fell 0.3% in October, to an annual rate of 368,000 compared to September's 369,000. Economists had expected a rate of 390,000.

Though a slight drop from the previous month, October's new home sales rate is actually up 17.2% year over year.

And while far below the peak of 1.4 million reached at the height of the housing bubble, new home sales continue to creep up from the sub-300,000 lows seen in 2010 and 2011.

That, combined with recent positive trends from just about every other housing indicator, such as existing home sales, housing starts, building permits, and the home builder sentiment index, had most analysts brushing off the negative new home sales numbers.

On Monday, for instance, the Case-Shiller index for the third quarter showed housing prices nationwide were up 3.6% from the same period one year ago, its second year-over-year gain.

"We expect new single-family housing demand to continue its modest upward trend throughout the next year, driven by record-high affordability," Yelena Shulyatyeva, an economist with BNP Paribas, said in a research note.

Why New Home Sales Missed Expectations

So if housing is in a recovery, why would October's home sales numbers turn south?

Much of the blame was put on Hurricane Sandy, which disrupted real estate activities in the densely populated Northeast for several weeks.

The raw data bears out this theory. New home sales fell by 32.3% in the Northeast. Meanwhile, new home sales rose a startling 62.2% in the Midwest, and a modest 8.8% in the West.

Some experts also suggested that the effect of the fiscal cliff on next year's economy might have helped throw off new home sales last month.

"Fears of the fiscal cliff could be impacting potential buyers already," wrote CNBC real estate reporter Diana Olick in her Realty Check blog. "The housing recovery depends on the economic recovery and continued improvement in the jobs picture. There is also great concern that the mortgage interest deduction could fall victim to the cliff."

Threats to New Home Sales in 2013

While most experts are optimistic that new home sales will continue to recover, they warn that it remains weak and vulnerable.

Threats to new home sales in 2013 would include any setbacks to the economy resulting from such looming threats as the government's inability to deal with the fiscal cliff or a sudden blowup of the never-quite-solved Eurozone debt crisis.

Within the housing market itself, the biggest threat to new home sales continues to be tight credit. While mortgage rates remain historically low, increasingly strict post-bubble lending standards have created challenges for some.

"Financing of first-time homebuyers with low down payments threatens to become a significant problem in the U.S. housing market," Thomas Popik, research director for Campbell Surveys told National Mortgage Professional Magazine.

Popik said 50% of first-time buyers use FHA financing, which is raising its insurance premiums and tightening its standards.

What's more, he's worried that conventional mortgages also could get harder to obtain in the wake of the still-pending Qualified Residential Mortgage regulations, a part of the Dodd-Frank legislation.

In the long run, however, increased demand for housing should slowly keep pushing new home sales higher.

"On one hand, there is plenty of room for continued improvement but on the other, the healing process will take a lot of time and will likely be in fits and starts as recoveries from the aftermath of bubbles typically are," Peter Boockvar of Miller Tabak told CNBC.

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