Home sales soar

Thursday, July 28, 2005

WASHINGTON -- Sales of new homes soared to an all-time high in June as the red hot housing market kept sizzling.

The Commerce Department reported that single-family home sales jumped to a record annual pace of 1.37 million units in June, up 4 percent from May.

Meanwhile, orders for big-ticket manufactured goods posted a surprisingly strong 1.4 percent increase last month, and the Federal Reserve's latest snapshot of business activity showed the economy was steaming ahead in June and early July.

Analysts said the trio of reports Wednesday showed an economy with plenty of momentum headed into the second half of this year.

The Fed's latest economic survey showed a number of districts describing the current economic expansion as "solid," bolstered by further gains in manufacturing, strong auto and housing sales and rebounding tourism, all coming in spite of rising energy prices.

Fed policymakers meet on Aug. 9 and it is widely expected the central bank will boost interest rates for a 10th time since June 2004 as the central bank continues its efforts to make sure an expanding economy does not trigger inflation pressures.

Federal Reserve Chairman Alan Greenspan told Congress last week that one area where there are concerns is the housing market, which he described as being in the grips of "speculative fervor" in parts of the country.

The worry is that a price bubble could be developing in the hottest markets around the country that could burst and send home prices plunging much as the stock market bubble burst in early 2000. Greenspan has expressed concerns that homeowners who used exotic instruments such as interest-only mortgages could see the value of their mortgage outweigh the reduced price of their homes.

Sales of existing homes also set a record in June as the housing industry continues to be powered by low mortgage rates with the median price of an existing home hitting a record high of $219,000, up 14.7 percent from June 2004, the biggest annual increase in nearly 25 years.

The report on new home sales, however, showed new home prices declining for a second consecutive month in June with the median price dropping by 5.5 percent to $214,800 in June, down 0.4 percent from a year ago. New home prices had set a record at $232,600 in April.

Michael Carliner, senior economist at the National Association of Home Builders, said the decline in new home prices could be an indication that demand is strengthening in the lower-end of the market.

Mortgage rates, which had been falling for much of this year, have risen for the past three weeks although they still stand at a historically low level of 5.73 percent for 30-year mortgages, according to the Freddie Mac survey.

Carliner predicted that sales of both new and existing homes will taper off slightly in the second half of this year as mortgage rates rise gradually to around 6 percent by the end of the year. But he discounted the threat of a housing bubble that will suddenly burst.

"I would doubt that we will continue to set new sales records," he said. "But the whole idea that there is a bubble suggests that it can pop and drop all at once. That is not typical of the housing market."

On Wall Street, the good economic news helped to lift stocks. The Dow Jones industrial average rose 57.32 points to close at 10,637.09.

The overall economy grew by 3.8 percent at an annual rate in the first three months of this year and analysts believe growth in the April to June period will be almost as strong, coming in at around 3.5 percent despite a surge in oil prices this year.

The 1.4 percent increase in durable goods in June followed a 6.4 percent surge in orders in May, which reflected a big increase in sales of commercial aircraft. After soaring by 167 percent in May, orders in this volatile sector fell by 24.2 percent in June.

Orders for new cars and auto parts edged down a slight 0.1 percent in June after having risen by 0.6 percent in May. Automakers, led by General Motors, have brought back attractive incentive offers to reduce a backlog of unsold cars which had caused production cutbacks in recent months.

Excluding transportation, durable goods orders were up a solid 2.6 percent in June, nearly triple the 0.9 percent rise in orders outside of transportation in May.

The strength outside of transportation was led by strong demand for communications equipment and computers. The category of non-defense capital goods, a good indication of business investment plans, rose 3.8 percent in June, its best performance since January.

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