In a recent report from the Commerce Department, sales of new homes throughout the country plunged unexpectedly in September, falling 3.6% to an adjusted annual rate of 402,000 units. That figure comes in well below August’s rate of 417,000 and even further behind the 440,000 pace that economists were anticipating.

Sales of new homes posted its first decline since March, as sales through September remain nearly 8% below last year’s levels. Since hitting a “bottom” in January, the housing market has seen a 22% surge in new home sales. Nevertheless, sales are still more than 70% off their peak sales levels reached in July 2005.

With more than 251,000 new homes for sale by the end of September, the lowest amount in nearly 17 years, the median sales price of those homes was $204,800, down more than 9% from the previous year’s mean selling price of $225,200. However, the recent price did reflect a 2.5% increase from August’s price of $199,900.

Meanwhile, the Standard & Poor’s/Case-Shiller home price index revealed an increase of 1% from July’s reading, with a reading of 144.5 for August. Although prices have begun to decline at a much slower rate than in the past, prices remain more than 11% below last year’s prices in August.

A contributing cause to the lack of sales in September comes from the fast approaching expiration of the tax credit assessed for first time buyers. The $8,000 stipend has helped bolster a sector that many have come to blame for the nation’s current economic woes. The government’s tax credit program is set to expire on November 30. That means that if an offer would be accepted today, the buyer would most likely not be eligible for the tax credit as it usually takes between 45 and 60 days for a sale to be finalized.

Because of the recent economic turmoil, members from the National Association of Home Builders (NAHB) have called upon Congress to help extend the federal tax credit program in an effort to help stimulate the industry, as well as possibly creating hundreds of thousands of jobs. The NAHB is proposing to the Senate Banking Committee that the program be extend until November 30, 2010.

Commenting on the proposal is David Crowe, Chief Economist with the NAHB, “Not only will builders soon be losing one of their most effective selling tools when the federal housing tax credit expires, they are also facing significant challenges that threaten to derail the fragile housing recovery before it even has time to take root.”

Crowe later added, “Strict mortgage underwriting and low appraisals are making it difficult for a willing buyer to complete the sale and terms and credit availability for builder acquisition, development and construction (AD&C) loans are extremely tight. The bottom line is that housing and the economy are at a critical crossroads.”

If the program is extended, Crowe remarked, “We estimate this would increase home purchases by 383,000 and create nearly 350,000 jobs in the coming year. It would also generate $16.1 billion in wages and salaries; $12.1 billion in business income and tax income of $11.6 billion for federal, state and local governments.”

Announced on October 29, Congress took a step closer to finalizing a deal that would extend the government program. A Senate committee reached an agreement that would offer buyers a tax credit of $6,500, but for existing homeowners. The credit is aimed at repeat home buyers who have owned a home for at least five years and should have a substantial impact on those homeowners that may seem trapped in their existing homes.

If the Senate passes the bill, it would then go to the House of Representatives, who passed a similar bill extending benefits for unemployed workers last month. An obstacle for the proposal passing could be the overall cost involved. Lawmakers are estimating that the overall cost for extending the program could cost upwards of $10 billion.

Nevertheless, nearly 1.4 million first-time homebuyers have qualified for the government’s tax credit. The NAHB reported that an estimated 350,000 of those homes sold would not have taken place if not for the credit provided.

Another by-product of the tax credit’s termination is the decrease in mortgage applications and refinancing requests. Because many are not eligible to meet the deadline for the credit, should it expire, the Mortgage Bankers Association (MBA) revealed on October 28 that there is great uncertainty within the industry that when, or if, these supports are withdrawn, whether the marketplace has enough momentum to endure.

The MBA’s mortgage index for the week ending October 22 showed that mortgage applications plunged 12.3%, while purchase applications fell more than 5% that week. Furthermore, those seeking to refinance their mortgage rates plummeted 16.2%.

For those that actually do have the means and capital to purchase a new home, the good news is that the national average for a 30-year fixed mortgage rate continues to remain near the 5% mark, currently at 5.03%. For those looking to refinance their mortgage, the most popular choice, a 15-year fixed rate, currently stands at 4.46%.

With rates hovering around the psychological 5% level for quite some time now, it remains better than the 6.26% that homebuyers were looking at this time last year.