New home inventories are slowly being absorbed, but made front page news by plummeting 16.6 percent in January, according to a new report by the Commerce Department, the slowest rate of sales in 13 years.

Since the red-hot summer of 2005, new home sales have fallen by nearly one-third, which is impacting all verticals related to it, including existing home prices and home improvement.

Unlike existing home sales, reported the day before by the National Association of Realtors, which lost some pricing power, new homes gained slightly. The national median existing-home price for all existing housing types was $210,600 in January, down 3.1 percent from January 2006 when the median was $217,400. But for new homes, there was a slight increase -- the median price of new homes rose in January to $239,800 from $238,400 in December. That's a price decline of only two percent from January 2006.

But while the NAR reported seeing some inventory being absorbed and supply going down to a more balanced 6.6 months of inventory on hand, the number of unsold new homes grew 19.3 percent to a 6.8-month supply from 5.7 months on hand in December.

That means that at least temporarily, builders will be striving to bring inventories down, by curtailing new home starts and by continuing to offer incentives to buyers.

This is likely to put additional pressure on the prices of existing homes which compete with new homes. If current trends continue, existing home sales in the spring will be robust but sellers may not attract offers as high as in previous record-setting years. In addition, more pressure will be put on sellers to repair, update and present properties that are closer to "new" homes in appeal and functionality.

Further, mortgage lenders will be forced to lend money more carefully if they want their loans to be bought by government-sponsored entities like Freddie Mac. Absent some sub-prime borrowers and housing speculators, the housing market has to appeal to mainstream buyers. The only thing that will encourage people to buy homes in an environment where price gains aren't meeting inflation costs and quick resales aren't possible because of high transaction costs is a whip-sawing stock market, which we got a taste of a couple of days ago.

NAR chief economist David Lereah believes that new home starts will pick up again in the latter part of the year. "When new home demand begins to catch up with supply, builders will slowly increase construction -- probably in the second half of this year," he said.

Meanwhile, opportunity is still there for existing home sellers and buyers. Sellers can take advantage of a rapidly reducing inventory overhang to price their homes to sell and get them off the market while buyers can take advantage of lower mortgage interest rates, courtesy of the economy's slowdown.