Home Sales Fall 11.6%, Steepest Drop in 2 Years

New-home sales fell 11.6% in May, the biggest decline in more than two years, the government reported Monday. The setback was attributed to rising mortgage rates and loan processing backlogs.

The Commerce Department said new single-family homes were sold at an annual rate of 764,000 units in May following a 5.7% April sales decline.

The decline in sales, the steepest since a 13% plunge in January, 1984, was widespread around the country.

Despite the back-to-back monthly declines of April and May, sales for the first five months of the year were at their best level since the housing boom of 1978. Actual sales from January through May totaled 356,000 units, 20.7% ahead of the same period last year.

First Time Since 1978

The boom in sales was spurred by a sharp decline in mortgage rates, which has led not only to a surge in sales but a rush by homeowners to refinance existing mortgages at the lower rates. Fixed-rate mortgages dropped below 10% in April, the first time this rate has been in single digits since 1978.

The increased loan demand has led, however, to growing delays in processing applications. In addition, rates stopped falling in late April and since that time have inched up by almost a full percentage point. Last week, the nationwide average for a fixed-rate mortgage was 10.62%.

Analysts attributed part of the May sales decline to the rising rates and processing delays, but they said these problems would present only a temporary damper on housing demand this year.

Roger Brinner, an economist with Data Resources of Lexington, Mass., predicted that mortgage rates will fall to around 9.75% in the next three months, reflecting the generally sluggish economy.

Lyle Gramley, chief economist for the Mortgage Bankers Assn., said he believed that single-family sales for the entire year would total about 800,000 units, nearly 15% higher than last year and the best sales year since 1978.

The average price of a new home climbed to $116,100 in May, 3.8% higher than in April and 18.3% higher than a year ago. This increase is more than four times the rate of inflation over the past 12 months. Analysts attributed the rise to escalating land prices.

“We have seen an explosion in land prices, particularly in areas like the Northeast where there is a lot of activity,” said Michael Sumichrast, senior economic consultant for the National Assn. of Home Builders.

In a separate report, the National Assn. of Realtors said that rising home prices had lowered their affordability index in May.

The trade group said that a $4,200 increase in the median price of an existing home pushed the index down to 98.9, meaning that a typical family had only 98.9% of the income needed to qualify for a loan on an existing home. The index stood at 101.9% in April.

The median price of a new home posted a slight decline in May, dropping to $92,300, 0.2% below the April level but still 15.2% higher than a year ago. Median means that half the homes sold for more and half for less.

The largest drop was a 22.5% decline in the West, where homes were sold at an annual rate of 193,000 units last month. The Northeast, which has been one of the hottest sales areas in the past year, suffered an 11.5% decline in May to an annual rate of 146,000 units.