THE ECONOMY : New Home Sales Rise 2.7% in May

Sales of new homes rose 2.7% in May as interest rates continued to fall, the Commerce Department reported Thursday. But analysts predicted that sales would remain slow because of the weakening economy.

Declining interest rates should produce increased home sales in the next few months, said Michael Carliner, vice president of the National Assn. of Home Builders.

“However, while interest rates are more favorable now, the economy is weaker . . . so the response will be less than it would be,” he said.

David Berson, chief economist for the Federal National Mortgage Assn., said the slower overall economic growth is a negative for housing.

“We’re not looking for a surge” in sales as rates decline, Berson said. “The improvement will be slow but steady.”

The slower economic growth and high interest rates have resulted from the Federal Reserve campaign against inflation. Although interest rates have begun to fall as the central bank appears to ease its grip, the economy continues to moderate.

Richard Peach, a Mortgage Bankers Assn. economist, also blames a satiated market for the slow sales pace.

“We’ve had several years of generally favorable conditions for home purchases,” Peach said. “We don’t have the pent-up demand, so things are kind of sluggish.”

Sharp Jump in April

The department said sales of new single-family homes rose to a seasonally adjusted annual rate of 613,000 units in May but still trailed the 676,000 rate in 1988 and the 671,000 rate in 1987.

For the first five months of the year, new home sales were down 7.1% from the same period a year earlier.

The May sales increase followed a 9.1% jump in April, although the figure was revised downward from the 10.9% increase reported earlier. Sales in February and March had dropped 11.3% and 11.9% respectively after rising 4.6% in January.

John A. Tuccillo, an economist with the National Assn. of Realtors, said part of May’s increase was due to first-time buyers entering the market because of lower interest rates.

Fixed-interest rates have been dropping since March, when they peaked at 11.22%. The rates averaged 10.48% the last week in May and were 10.19% last week, according to the Federal Home Loan Mortgage Corp.

“We anticipate the interest rate drops that occurred in June will allow more first-time buyers back in, boosting sales of both new homes and existing homes,” Tuccillo said.

Slower Rise in West

The rise in May sales was led by the Northeast, which posted a 12.6% increase to a seasonally adjusted annual rate of 98,000 units after falling 20.9% in April.

Other increases occurred in the West, up 7.7% to a rate of 197,000 units after a 28% increase in April, and the South, up 2.6% to a rate of 234,000 homes after a 16.3% increase a month earlier.

The Midwest had the only decline in sales, off 15.3% to an annual rate of 83,000 units. Sales had been flat in the region in April after falling 4.9% to an annual rate of 98,000 homes in March.

The median price of homes sold in May rose $9,000 to $125,000. The median price means half the homes sold for more and half for less.

The average price, which is pulled up by sales of expensive homes, rose $13,000 to $158,000.

Last week, the California Assn. of Realtors reported a sharp drop in existing house sales of California during May. CAR reported that, statewide, sales fell 9.5% from a year earlier; they were off 11.6% in Los Angeles.