New home sales climb, prices fall

WASHINGTON -- Sales of new homes in May climbed to the second highest level in history, providing further evidence that low mortgage rates are still fueling a booming housing market.

The median price of the homes sold did fall sharply, however. Analysts blamed the decline on a change in the regional make-up of sales last month and said it was not a sign that a potential speculative bubble in some markets was in danger of bursting.

They predicted that sales of both new and existing homes would remain strong through the summer with home prices continue to post double-digit increases compared to a year ago. However, they said sales and prices would likely start to taper off in the fall if mortgage rates finally begin to rise, something that has not occurred so far this year.

The Commerce Department report Friday said that sales of new single-family homes rose by 2.1 percent last month to a seasonally adjusted annual rate of 1.3 million homes.

The median, or mid-point, price for sales last month fell by 6.5 percent to $217,000.

Analysts attributed the decline to a big drop in sales in the Northeast, where homes are more expensive, and a big rise in sales in the Midwest, where homes are cheaper. New home prices set an all-time high of $237,300 in February.

The strong new home sales followed a report Thursday that sales of previously owned homes totaled 7.13 million units at an annual rate in May, a slight decline from the record April pace, but still the second fastest sales rate on record for existing homes. The median sales price of existing homes continued rising in April to hit a record of $207,000.

Wall Street suffered its second straight 100-point-plus loss on Friday as investors continued to worry about surging oil prices. The Dow Jones industrial average fell 123.60 points to close at 10,297.84. The Dow had fallen 166.49 points on Thursday.

The housing market has been red-hot this year with demand being driven by mortgage rates that have hovered near historic lows. This surge in demand has raised concerns that a speculative fever is creating a housing bubble similar to the stock market bubble that burst in early 2000.

Federal Reserve Chairman Alan Greenspan has talked of "froth" in local housing markets which have seen a big run-up in prices and he has expressed concerns about the growing popularity of such mortgage instruments as interest-only loans which could leave homeowners vulnerable if prices decline sharply.

But private economists said they believed the most likely outcome for the current boom was a gradual slowing in sales and price increases later this year as mortgage rates begin to rise, reflecting the continued campaign of the Federal Reserve to push short-term rates higher to dampen inflation pressures.

"I think there are bubbles in some cities, but nationally we won't see a big home price decline, but we are not going to see continued home price increases of 10 percent a year either," said David Wyss, chief economist at Standard & Poor's in New York.

The increase in sales of new homes was led by a 22.9 percent jump in sales in the Midwest followed by an increase of 1.7 percent in the West. However, sales fell a sharp 24.5 percent in the Northeast and were down 0.8 percent in the South.

In other economic news, orders for durable goods rose by 5.5 percent last month, the biggest increase in 14 months. However, economists cautioned that this increase overstated the strength in manufacturing because it was inflated by a huge jump in demand for commercial aircraft.

Excluding the volatile transportation sector, new orders for durable goods fell by 0.2 percent last month, marking the third decline in the past four months for orders outside of transportation.

Demand for non-defense capital goods was even weaker, falling by 2.3 percent, the biggest drop since last October. This category is closely watched for signs it can give of business plans to invest in new equipment to expand and modernize.

Economists have grown worried that manufacturing, the hardest hit sector in the 2001 recession, could be showing signs of faltering again as businesses grow more cautious in the face of a renewed surge in oil prices.

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New home sales: http://www.census.gov/newhomesales

Durable goods orders: http://www.census.gov/m3