Policy: Economy

Weak new-home sales raise fear of faltering housing recovery

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PennAve,Joseph Lawler,Economy,Budgets and Deficits,Housing

The number of new home sales dropped in July to the lowest level in nine months, raising fears that rising mortgage rates are slowing progress in the housing market.

The Census Bureau and Department of Housing and Urban Development reported Friday that 394,000 new single-family homes were sold in July, down 13.4 percent from June’s rate, although up 6.8 percent from a year ago. Analysts expected 487,000 new home sales.

The news of the steep drop-off follows a Wednesday report from the National Association of Realtors that showed existing home sales rising steeply in July to 5.39 million, a 6.5 percent increase from the month before and a 17 percent increase from the year before. NAR’s chief economist Lawrence Yun attributed the sharp increase to the highest mortgage rates in two years “pushing some buyers off the sidelines,” fearing that rates may climb further.

Interest rates on 30-year fixed-rate mortgages hit a two-year high on Thursday at 4.58 percent, according to Freddie Mac. The rate had been as low as 3.35 percent in early May, before Federal Reserve Chairman Ben Bernanke suggested in a congressional hearing that the Fed might begin scaling back its large-scale bond purchases later in the year.

The Fed’s asset purchases include $40 billion in mortgage-backed securities issued by government-sponsored enterprises every month. The Fed is widely believed to be planning to reduce the size of its monthly purchases in September or later in the fall, which would reduce the accommodation provided to the still-recovering housing market.

Minutes from the Fed’s July monetary policy meeting show that while some officials are confident that the housing recovery has been “resilient” in the face of higher mortgage rates, markets’ reactions to rising mortgage rates is one of the factors the central bank is watching closely to make sure support for the housing market isn’t cut off too soon.

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