March 28, 1997 in Nation/World

Economic Signs Jolt Wall Street Surging Home Sales, Declining Claims For Jobless Benefits Raise Concerns

Dave Skidmore Associated Press
 

New signs of economic strength, including the largest increase in existing home sales in more than a decade, sparked a sell-off on Wall Street Thursday.

The home sales report for February from the National Association of Realtors, along with a drop in new claims for unemployment benefits last week, fueled Wall Street speculation that the Federal Reserve will need to raise short-term interest rates again by summer.

The Dow Jones industrial average plunged 140 points to close at 6,740.59. The yield on the 30-year Treasury bond shot to a six-month high of 7.08 percent, up from 6.98 percent late Wednesday.

On Tuesday, in the first monetary tightening in two years, the Fed raised short-term interest rates a quarter percentage point, citing “persisting strength in demand” that is increasing the risk inflation will accelerate.

After that, economists were divided about how soon the central bank would need to raise rates again, with some predicting the Fed would take no action at its next meeting on May 20. Thursday’s reports support the case for a quick follow-up.

February’s 9 percent increase in sales of existing single-family homes was the sharpest since April 1986. The level of sales, a seasonally adjusted annual rate of 4.26 million, came close to the all-time record of 4.28 million, set in May.

Unseasonably warm weather, relatively low interest rates and a strong job market all contributed to the big gain.

Meanwhile, the Labor Department said new claims for unemployment insurance fell by 4,000 last week - the third decline in four weeks - to a seasonally adjusted 310,000. Claims in the low 300,000-range are consistent with strong economic growth and a tight labor market.

And the Conference Board, a New York-based business research group, said help-wanted advertising in 51 major newspapers climbed 3.4 percent last month.

For all of 1996, existing home sales totaled 4.09 million, the best in 18 years. However, with interest rates rising, many analysts are expecting a more moderate though still robust sales rate this year.

“This year is coming in like a lion but we expect it to go out a little slower,” said economist Paul Taylor of America’s Community Bankers. “If there’s another rate hike and if employment growth slows down, and if you add a stock market correction to that, then clearly things will be slowing down.”

In just the past five weeks, 30-year, fixed-rate mortgages have climbed nearly half a percentage point to 7.97 percent this week, according to the Federal Home Loan Mortgage Corp. That increases the monthly payment on a $100,000 mortgage by about $35.

Freddie Mac’s economist, Robert Van Order, said he doubted mortgage rates would climb higher than 8.5 percent this year, keeping mortgages affordable for most buyers.

“Housing looks better than it has since the late 1980s,” he said.

In the short term, recent rate increases could increase sales by drawing “fence-sitters” into the market - people who don’t want to risk a further rise,” said the Realtors’ economist, John A. Tuccillo.

By region in February, sales soared 13.6 percent in the West, 10 percent in the Midwest, 8.6 percent in the Northeast and 5.5 percent in the South.

The median price of an existing home was $117,500 last month, up 3.1 percent from a year earlier. In the West, the median price was $151,200, up 3.2 percent.


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