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The Commerce Department reported that new home sales in December dropped to the lowest level in nearly 13 years.

Instead of the million or two we're used to hearing reported at year's end, new home builders only sold about 774,000 new homes in 2007. That's 26.4 percent below 2006, and the biggest year-over-year drop since 1963, when new home sales were first tracked by the government.

Prices fell dramatically in December for both the average (-11.5 percent to $267,300) and the median (10.9 percent to $219,000) price fell 10.9 the biggest drop in prices since 1970. The median is the point at which half the sales are under and half the sales are over.

Completed homes were 40 percent of the inventory on hand, which is a 26-year-high in relation to the pace of sales. There is now a 9.6 month supply of homes for sale at the December sales pace.

The National Association of Realtors had recently reported the first year in decades that the median sales price fell.

New homes costing more than $400,000 fell 50 percent from a year earlier, illustrating that the credit crunch isn't over yet for jumbo loans. And sales financed by conventional loans fell 27 percent. Home sales with VA or FHA loans fell 16 percent. Homes purchased with cash fell 24 percent.

But as bad as all that sounds, things could turn around.

Clearly buyers are waiting for prices to come down, but since December, mortgage interest rates have softened a full percentage point to near record lows. Consumers can save approximately $100 a month in payments, and qualify for homes that might have been out of reach a month ago.

The government is feverishly working on solutions that will raise the conventional loan limit from $417,000 to $625,000 which would allow more people to finance without resorting to exotic loans.

In addition, new home standing inventory has caused existing home sales to soften. If more inventory is absorbed in new homes, that improves the outlook for existing homes.

Look for a much better late winter and early spring. Home sale trends are identified over several months.

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