New Home Sales Hit Best Level Since Early ’87 : Factory Orders Up 1.6% in October, Fueled by Spending Spree on Military Equipment

New home sales in October jumped to their highest level since February, 1987, the government said Friday, surprising analysts who have been expecting rising interest rates this year to dampen sales.

In a joint release, the departments of Commerce and of Housing and Urban Development said sales increased to a seasonally adjusted annual rate of 733,000 units, the highest level in 20 months.

Adding to the robust housing picture, the government sharply revised its September figure to a 1.4% drop, up from the previously estimated minus 7.8%.

A 5.1% increase in the West, boosted by strong population growth in California, was the highest since March, 1979; 279,000 homes were sold that year. For the current year, sales in the West are running about 12% higher than last year.

Factory Orders Up

In a separate report, meanwhile, the Commerce Department said orders to U.S. factories for manufactured goods increased 1.6% in October, driven by a surge in spending for military equipment.

Orders for durable and non-durable goods climbed to a seasonally adjusted $226.2 billion, after a 1.9% decline in September.

Defense spending shot up 42.5% to $10.6 billion, on the strength of orders for ships and tanks, after falling 7% in September.

“The military sector just went through the roof with the opening of the new fiscal year,” said David Wyss, an economist with Data Resources Inc., a forecasting firm in Lexington, Mass. “The generals had money in their checking accounts again, so they were busy writing checks.”

However, Wyss said that even excluding defense orders, manufacturing remains strong. He pointed to the backlog of unfilled orders, which jumped 0.8% in October, 0.3% in September and 1.2% in August.

“We’re still getting more orders in than we’re shipping goods out,” he said.

With the lastest figures on housing, sales in the first 10 months of the year are a slight 0.2% higher than the same period last year, defying predictions by most economists last year that 1988 sales would be lower as interest rates rose.

Fixed-rate mortgages did rise from March through mid-August, but eased until early November before starting to climb again. Adjustable-rate mortgages, however, have risen steadily since the spring and are nearly as high as before the October, 1987, stock market crash.

Sales Fall in South

“I think this is probably about as good as it gets,” Michael Carliner, an economist with the National Assn. of Home Builders, said of the sales rate. “We have seen interest rates rising over the past few weeks and the rate of economic growth is likely to slow somewhat.”

Home sales rose 14.6% in the Northeast to an annual rate of 110,000 units and 8.1% in the Midwest to a 107,000-unit rate. In the South, sales fell 3.9% to an annual rate of 249,000.

For the year, sales are holding steady in the Midwest and South. In the Northeast, they’re running about 9% lower, which economists attribute to high prices.

The median price of new homes nationally fell 0.9% in October to $115,900, meaning half sold for more and half for less. That followed a 6.4% rise in September.

The average price, which is pulled up by very expensive homes, fell 2.1% to $140,100 after an identical increase a month earlier.

The median was 8.8% higher than a year ago, while the average was 11.4% more.

Meanwhile, new orders for the first 10 months of this year are up 9.3% from a year ago, compared to a 6.6% increase between the same periods in 1987 and 1986.

However, the key category of non-defense capital goods, considered a good barometer of industry investment plans, fell 3% to $33.8 billion, after a large 10.2% drop in September.

Transportation Gains

October orders followed a pattern set during the past several months in which the presence or absence of big transportation and military orders influenced overall performance.

Transportation spending, bolstered by motor vehicle manufacturing in addition to tank and shipbuilding, jumped 8.5% in October to $34.3 billion after a decline of 8.9% in September.

Excluding the transportation category, orders rose 0.4% in October and fell 0.7% in September. Minus defense, orders edged up 0.2% in October after dropping 1.7% in September.

Orders for all durable goods, “big ticket” items expected to last three or more years, rose 2.3% in October to $122.1 billion after a 2.8% drop in September.