U.S. Treasury Secretary Henry Paulson says the troubled housing market started the country's economic problems, and continues to underlie them.

A new report by the Commerce Department says new home sales dropped almost two percent last month, the slowest pace since 1995.

This, on the same day President Bush says he knows the economy has hit a rough patch.

After touring a printing company in Northern Virginia, President Bush said he and his advisors believe the troubled economy will turn around after tax rebates from the economic stimulus package kick in.

"There's a rough patch right now in our economy, but I'm confident in the long term we'll come out stronger than ever before,” said President Bush.

Most analysts say it was the troubled housing market that started the turmoil in the capital markets.

Today, Treasury Secretary Henry Paulson continued to call housing the biggest downside risk to the economy.

Paulson said the current housing downturn was ignited by unsustainable appreciation of home prices – appreciation that got particularly high in some regions.

"A correction was inevitable and the sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilize, more buyers return to the housing market, and housing will again contribute to economic growth," said Henry Paulson, Secretary of Treasury.

Today, the Commerce Department released new housing figures.

New home sales dropped 1.8 percent last month, a decline slightly worse than expected.

That marked the fourth straight month of a decline and the slowest pace for new home sales in 13 years.

The number of unsold homes on the market at the end of last month marked the highest inventory in 26 years.

Sales dropped by more than 40 percent in the northeast, were down slightly in the midwest, but home sales were up slightly in the south and the west.

Also on the positive side, applications for mortgages jumped up 50 percent last week and applications to refinance home loans soared 82 percent

The Treasury Secretary warned that there are many calls to do something about housing –calls to minimize foreclosures, make affordable mortgages more available, improve the secondary market for mortgages, prosecute fraud, reduce the inventory of homes for sale, or help communities hardest hit by foreclosures.

Paulson also said the Bush Administration will soon put forward a blue print of potential changes to promote better functioning of the financial markets and in the wake of the demise of investment house Bear Stearns. Secretary Paulson said there could be stepped up regulations.