Sales of New Homes Slump; Rate Rise Cited

New home sales suffered their steepest drop in seven months in July, the government said Monday, and economists predicted further softening as rising mortgage interest rates push up the cost of buying a home.

Sales of new single-family homes fell 4.7% to a seasonally adjusted annual rate of 686,000 units last month, according to a joint report of the departments of Commerce and Housing and Urban Development.

The government also revised estimates for June and May downward, showing less housing strength than previously believed.

Fixed-rate mortgages have risen by almost a point since March to their highest levels of the year, boosting the monthly payment on a new $100,000 mortgage by about $65.

Note of Optimism

And a half-point boost earlier this month in Federal Reserve’s key bank lending rate “doesn’t bode very well for the coming months,” said Thomas M. Holloway, senior economist at the Mortgage Bankers Assn. of America. He predicted another half-point or so increase in mortgage rates by the end of the year.

“That should be considered quite discouraging,” Holloway said.

However, other economists noted that even though new home sales in July took their sharpest tumble since a 6.2% drop in December, they were still strong. The decrease in July followed a 6.7% increase in June, which buoyed sales to the highest level since April, 1987.

Economists attributed the June upturn in part to attempts by buyers to close deals before interest rates went higher.

“The June number was unusually high, so I’m certainly pleased by the July number,” said Mark Obrinsky, an economist with the U.S. League of Savings Institutions. “If (interest) rates continue to go up, then we’ll certainly see some decrease in sales activity, but overall it’s not looking too bad.”

Rate increases “have been gradual enough not to add any psychological fuel to the fire,” Obrinsky said. “The rates are still relatively affordable, and they are still lower than they were last fall.”

For the first seven months of the year, new home sales were 3.0% lower than in the year-ago period.

Prices Sharply Higher

The July drop in new home sales was in line with other housing indicators for the month. Construction starts of single-family homes fell 0.8%, and sales of existing homes were off by 5.0%.

Meanwhile, the price of new homes was up sharply in July even though sales fell. The median price of a new home rose to $123,500, 5.6% above the June median price of $117,000, meaning half the homes sold in those months cost more and half less.

The average price of a home was up as well, climbing 7.1% to $146,000.

Michael Sumichrast, a Washington-based economist and publisher of a construction newsletter, blamed the price increases rather than interest rates for declining sales last month.

“Prices . . . just cannot continue at these levels. . . . They just went totally crazy . . . and it’s finally catching up, particularly in New Jersey and New York,” he said.

By region, sales in July were down most steeply in the Northeast, where they fell 18.4% to an annual rate of 93,000. The Midwest posted a 5.5% decline to a rate of 86,000, and sales in the South fell 4.9% to a rate of 270,000. Sales in the West were up 2.6% to a rate of 237,000.

Sumichrast predicted declining sales in all four regions next year. He said the drop would be most moderate in the South and Midwest, and steepest in the West and Northeast, where prices are highest.

Meanwhile, Bank of America released its annual outlook on California’s real estate industry, saying that residential property values in the state are expected to increase substantially in 1989 and that mortgage rates are projected to hit 11.5% early in the year.

“A slowdown in the economy, coupled with higher interest rates, will reduce construction activity in the state in 1989,” said Frederick L. Cannon, the bank’s senior economist and author of the forecast.

“Cutbacks in construction, continued strong real estate demand and falling vacancy rates are the reasons why residential real estate values will jump next year,” he added. “The lack of affordable housing in California, long a political and economic dilemma for business and government leaders, will continue to worsen in 1989.

“In addition, the cost of renting an apartment or a house will go up next year, as well as rents on commercial properties,” he said.