The housing market's woes continue today as we get the numbers from last month's homes sales. According to a report from the Commerce Department sales of new homes fell 3.9% during the month of February.

February's disappointing results follow on the heels of January's 15.8% decline which was the largest one month drop in 13 years. With last month's decline the seasonally adjusted annual rate is now coming in at 848,000 which puts us on the slowest sales pace in the last 7 years.

Across the nation the only area that saw growth in new homes sales was the West, which saw sales numbers jump 24.6%, but this was following a devastating month of January which saw the same region decline by 25.8%. The average price of a new home nationwide is now running at $250,000 which is 0.3% below this time last year.

Following today's report home builders have been taking a pretty good hit on Wall Street:

• Ryland Group (NYSE: RYL) is currently trading down 1.5% to $45.41 down $0.71.
  
• Centex Corp (NYSE: CTX) is currently trading down 1.6% to $43.13 down $0.70.
  
• KB Home (NYSE: KBH) is currently trading down 1.9% to $45.98 down $0.88.
  
• Pulte Homes (NYSE: PHM) is currently trading down 1.9% to $27.04 down $0.52.
  

Michael Fowlkes has worked as a stock trader for seven years and spent the last two years working as an analyst for the online investment advisory service Investor's Observer.

Just when you think you may have seen the worst of times for home sales we get a news report out today to bring you back to reality. A new report today showed the biggest decline in new home sales in the last 13 years.

According to a new government report today January witnessed a massive 16.6% decline in the sales of new homes in America. The last time we saw a fall of this amount was way back in January 1994 when sales fell by a whopping 23.8%.

Things looked to be getting a little brighter for the housing market yesterday when we were given some positive data on existing home sales which put up better than expected gains last month. During January we saw the biggest rise in two years in existing home sales with a 3.0% rise from December.

Homebuilders have been taking a hit today. DR Horton Inc. (NYSE: DHI) is trading down 1.6%, Toll Brothers Inc. (NYSE: TOL) is down 2.1%, Hovnanian Enterprises Inc. (NYSE: HOV) is currently down 2.4% and Pulte Homes Inc. (NYSE: PHM) has sold off 1.7%.

Bill Miller, the famed Legg Mason fund manager, was on television last week. He said he is long on housing stocks.

In Barron's Up and Down Wall Street column (subscription required), Doug Kass of Seabreeze Partners said he was short housing stocks - no big surprise there. Kass referred to order cancellation as the reasoning for his bearishness.

Typically, publicly traded homebuilders have cancellation rates of 15% of orders. However, that number has jumped considerably. Cancellation rates of publicly traded homebuilders:

• Centex (NYSE: CTX) - 37%
• DR Horton (NYSE: DHI) - 40%
• KB Homes (NYSE: KBH) - 53%
• Lennar (NYSE: LEN) - 31%
• Pulte Homes (NYSE: PHM) - 36%
• Beazer (NYSE: BZH) - 57%
• Hovnanian (NYSE: HOV) - 35%
• MDC Holdings (NYSE: MDC) - 49%
• Standard Pacific (NYSE: SPF) - 50%

These numbers (from the Barron's article) are so bad that the worst might be unfolding right now.

TheFly's advice, Miller tends to be too early and Kass is often too negative when the worst is already priced in the stocks. I'd say, start following these stocks again, expecting a bottom in the spring and early summer.

The most recent rally is mostly from an oversold condition. I'd wait for another correction and see where the industry fundamentals stand.

MOST NOTEWORTHY: Sovereign Bancorp (SOV) and the Homebuilders sector topped the upgrade list today.

• Citigroup upgraded Sovereign Bank Inc. (NYSE:SOV) to Hold from Sell with a $25 target, citing expectations for management to announce a larger cost-cutting program in January of 2007.
• Bank of America upgraded the Homebuilders sector to Neutral from Cautious after their survey showed traffic improvements in 33 of 39 markets in November relative to October; They do not expect a smooth trend, instead, the firm expects to see choppiness in the market for the next 12-24 months.
  • In conjunction with the sector upgrade, Bank of America upgraded Standard Pacific (NYSE:SPF) to Buy from Neutral,
  • and Meritage Homes Corp. (NYSE:MTH), NVR Inc. (NYSE:NVR), Pulte Homes Inc. (NYSE:PHM), The Ryland Group Inc. (NYSE:RYL) and Toll Bros. Inc. (NYSE:TOL) to Neutral from Sell.

OTHER UPGRADES:

• Sanofi-Aventis (NYSE:SNY) was upgraded to Overweight from Neutral at HSBC.
• SAP AG (NYSE:SAP) was added to Merrill Lynch's Europe 1 list.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).