Home Sales Surge 19% in May, Raising Doubts of Rate Cut : Economy: California leads the West in unexpected jump in housing market. Jobless report also indicates underlying strength.
Lower mortgage rates fueled an unexpected 19.9% surge in sales of new single-family homes in May, suggesting that the economy is stronger than believed and raising doubts that the Federal Reserve Board will lower interest rates.
Sales in the West--dominated by California--climbed 19.7%, possibly signaling a strengthening of the state’s housing market.
The nationwide increase--the biggest monthly jump since January, 1992--drove bond yields sharply higher as many investors lost hope for a Fed rate cut.
In another report pointing to underlying resilience in the economy, the Labor Department said 28,000 fewer Americans applied for jobless benefits last week than the previous week, when applications hit a 17-month high of 396,000.
The home sales report “suggests that worries about a recession may be overstated,” David Wyss, research director at DRI-McGraw Hill said, adding that the Fed will use the statistic as an excuse not to lower interest rates at its policy-setting meeting Wednesday and Thursday.
The Fed has held rates steady for the past five months. In recent days, financial market speculation had intensified about the prospects for a stimulative rate cut because of weaker manufacturing activity and sluggishness in retailing.
However, other economists questioned whether the sales report for new homes signals that the economy has strengthened. Some pointed out that the figure is far stronger than that for sales of existing homes, arousing some suspicion because the two figures usually track each other. Resales of existing homes rose 4.7% in May.
The surge in new home sales “looks too good to be true. Boom-time home sales are not consistent with deteriorated job growth and consumer confidence,” said David Hensley, regional economist at Salomon Bros., which continues to predict that the Fed will cut rates by a quarter of a percentage point next week. “The job numbers are going in the wrong direction to support such a strong rebound in sales.”
Analysts credited lower mortgage rates for the rise in new home sales to a seasonally adjusted annual rate of 722,000 units. Thirty-year, fixed-rate mortgage rates averaged 7.91% in May, down from 8.32% in April and the peak of 9.25% during the Christmas season. May’s figure is the lowest monthly average since the 7.15% rate of February, 1994.
New home sales in the West rose to an annual rate of 207,000, the strongest since a 213,000 figure in March, 1994.
But industry officials and economists also disagreed on whether the surge signals a rebound in the California housing market.
At Los Angeles-based Kaufman & Broad Home Corp., orders for new homes in the second quarter are up 37% over the first quarter of 1995, Vice President Jeffrey Charney said. Response to a new television ad campaign and increasing traffic on home tours point to a continued rise in housing starts, he said.
But the California Building Industry Assn. has been scaling back its estimates for housing growth. Early this year, the association predicted that 120,000 to 140,000 new homes would be built in California this year. Now it is predicting 100,000, not many more than the 96,000 homes built in the state in 1994, association Vice President Cliff Allenby said.
Leslie Bellamy, president of the California Assn. of Real Estate Brokers, said he does not see strong sales in the new home category.
“Most of the properties selling in different communities are foreclosed properties,” he said.
It is a buyers market in California, Bellamy said. Sellers can expect a home to sit on the market for four months. Particularly in Southern California, many homeowners have debt that is higher than the resale value of their homes, because they purchased when the market was inflated in the late 1980s and interest rates were high.
* RATES RISE
Bond yields surge as hopes ebb for Fed rate easing. D2
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New Home Sales
Seasonally adjusted annual rate, in thousands of units:
May 1995: 722
Source: Commerce Department
