Prices of Homes Drop Sharply as Sales Slow : Median Cost of New House Declines 5.5%

Sales of new homes edged down a slight 1.5% in October while home prices fell sharply, the government said Wednesday. Despite the decline, which was accompanied by a slide in prices, analysts said the report indicated that the housing industry may come through the stock market collapse in good shape.

The Commerce Department said that new single-family homes were sold at a seasonally adjusted annual rate of 657,000 units in October, following a 2.8% decline in September sales.

The median price of a new home fell 5.5% to $104,000 after hitting an all-time high of $110,000 in September. The decline pushed the median, or mid-point, home price to its lowest level since April.

In addition to the decline in the median price of a home, the average price decreased as well, dropping 10.1% to $122,400, compared to $136,100 in September.

The small drop in sales was less than many analysts had been expecting given the negative effects of high interest rates at the beginning of October and the collapse of the stock market on Oct. 19.

“These figures suggest that the market for home sales has not been adversely affected in any major way by the stock market declines,” said Lyle Gramley, chief economist for the Mortgage Bankers Assn.

Mortgage Rates Down

David Seiders, chief economist for the National Assn. of Home Builders, said surveys done by his association before and after the stock collapse showed that builders are actually more optimistic now because of the easier money policies being pursued by the Federal Reserve.

Immediately after the stock collapse, the central bank moved aggressively to pump money into the economy to insure that the sudden loss of wealth from the record 508-point decline in stock prices would not threaten the U.S. financial system.

Mortgage rates, which had hit a two-year high of 11.58% on Oct. 16, have now declined by about 1 percentage point. Seiders said it was this decline which has bolstered builders’ expectations.

“Builders believe they will be able to get through the stock market mess in pretty good shape,” he said. “We are hoping that, if interest rates stay under control, we will be okay.”

Seiders predicted that fixed-rate mortgages, which were averaging 10.55% last week, should stabilize at that level for the next several months. He predicted that new home sales will total around 650,000 units next year, down only slightly from expected sales of 677,000 units this year.

For the first 10 months of the year, sales of new homes were down 9% from the same period in 1986.

The October sales decline was concentrated in the Northeast and South. Sales in the South fell 19.6% to an annual rate of 226,000 units. Sales were off 18.7% in the Northeast to an annual rate of 100,000 units.

In the Midwest, however, sales soared during the month, shooting up 47.4% to an annual rate of 112,000 units. Sales were also up in the West by 16% to an annual rate of 360,000 units.

James Christian, chief economist for the U.S. League of Savings Institutions, said part of the weakness in the Northeast may have been the impact of the stock market crash on suburbs that cater to Wall Street brokers. He said an even bigger factor was a trend in that region to a slowdown in sales following several years of rising demand.

Many economists said the jump in demand in the Midwest reflected in part improving fortunes for manufacturing companies who have seen their export sales rise sharply this year.