New-Home Sales Drop; Factory Orders Climb

New-home sales in August fell 5.6% from their July peak, but housing analysts Wednesday shrugged off the decline, contending that attractive mortgage rates should keep demand at strong levels in coming months.

In a separate report, the Commerce Department reported that U.S. factory orders rose a modest 0.9% in August as a strong demand for autos and airplanes was offset by a slump in demand for food products.

Sales of new single-family homes were put at a seasonally adjusted annual rate of 705,000 in August, following a 5.5% rise in July, according to a report from the Commerce and Housing and Urban Development departments.

Analysts said the July figure was revised upward from an originally reported 1.4% increase.

“The August decline is not cause for concern and does not indicate a trend,” said Jack Carlson, chief economist for the National Assn. of Realtors, who noted that sales from June through August were running 6.4% above sales in the preceding three months.

“Clearly, new-home sales activity is on an upward trend compared to last year and the first half of this year,” he said. “The housing market is continuing to exert a strong positive influence on the rest of the economy and is helping to prevent a recession.”

The housing report showed that, even with the decline in sales in August, the inventory of unsold homes fell to 350,000, or a supply of 5.8 months at the August sales pace, the lowest level in the past year.

Analysts said this level would encourage builders to continue strong construction activity in coming months, particularly because mortgage rates are expected to remain stable.

Lyle E. Gramley, a former member of the Federal Reserve Board and now chief economist at the Mortgage Bankers Assn., said he expects mortgage rates to stay in a holding pattern into next year. But he warned that interest rates and inflationary pressures could begin rising sharply by the end of 1986 because of the falling dollar.

Kenneth Rankin, housing economist at Wharton Econometrics, predicted that mortgage rates may actually decline some more through the rest of the year, putting home ownership within the reach of even more Americans.

Fixed-rate mortgages are currently going for about 12.25%, down from a high last summer of 15.2%.

The average price of a home fell 1.2% in August to $98,300, but the median price rose a slight 0.9% to $82,400. The median price means half the homes sold for more and half for less.

The sales decline was led by a 14% drop in home sales in the West, followed by an 11.9% decline in the Midwest.

New-home sales in the South, which accounted for about half of the new homes built last year, dropped a smaller 1.7%, while the Northeast was the only region showing a gain in August, a 2.7% advance.

Commerce said total factory orders rose to a seasonally adjusted $197.5 billion in August, partially reversing a 1.2% July decline.

Some economists had forecast an even sharper rise based on an advance report last week that showed orders for durable goods, items expected to last three or more years, rising by a strong 3.4%.

The report said that orders for durable goods increased 2.6% to a seasonally adjusted annual rate of $107.04 billion and showed that orders for non-durable goods actually fell by 1.1% in August. In its earlier advance report, the department had estimated that durable goods orders had risen 3.4%.

Analysts said they were heartened by a 3.9% rise in demand for non-defense capital goods, a category that is watched for signals it gives about industry plans to expand and modernize.

David Ernst, an economist with Evans Economics, a Washington consulting firm, said this advance showed that businesses planned to boost capital spending in coming months.

“Interest rates are at modest levels compared to recent years and I believe businesses are willing to invest again,” he said.

The increase in durable goods was led by a big 10.6% rise in the transportation category caused by heavy demand for automobiles and airplanes.

Auto sales have soared in recent weeks as consumers took advantage of attractive cut-rate financing deals being offered by U.S. auto makers.

Orders for military equipment rose 3.9% in August to $9.97 billion following a 14.6% July decline.