June 25, 2005 in Business

May home sales 2nd highest ever

Martin Crutsinger Associated Press
 

WASHINGTON — Sales of new homes in May climbed to the second highest level in history, providing further evidence that low mortgage rates are still fueling a booming housing market.

The median price of the homes sold did fall sharply, however. Analysts blamed the decline on a change in the regional make-up of sales last month and said it was not a sign that a potential speculative bubble in some markets was in danger of bursting.

They predicted that sales of both new and existing homes would remain strong through the summer with home prices continuing to post double-digit increases compared to a year ago. However, they said sales and prices would likely start to taper off in the fall if mortgage rates finally begin to rise, something that has not occurred so far this year.

“The big key going forward will be what happens to long-term interest rates,” said David Seiders, chief economist at the National Association of Home Builders. “I think we will see some modest fade in the numbers for both new and existing homes by the end of the year.”

The Commerce Department report Friday said that sales of new single-family homes rose by 2.1 percent last month to a seasonally adjusted annual rate of 1.3 million homes, second only to a 1.31 million sales pace set last October.

The median, or mid-point, price for sales last month fell by 6.5 percent to $217,000. Analysts attributed the decline to a big drop in sales in the Northeast, where homes are more expensive, and a big rise in sales in the Midwest, where homes are cheaper. New home prices set an all-time high of $237,300 in February.

The housing market has been red-hot this year with demand being driven by mortgage rates that have hovered near historic lows. This surge in demand has raised concerns that a speculative fever is creating a housing bubble similar to the stock market bubble that burst in early 2000.

Federal Reserve Chairman Alan Greenspan has talked of “froth” in local housing markets which have seen a big run-up in prices and he has expressed concerns about the growing popularity of such mortgage instruments as interest-only loans which could leave homeowners vulnerable if prices decline sharply.

But private economists said they believed the most likely outcome for the current boom was a gradual slowing in sales and price increases later this year as mortgage rates begin to rise, reflecting the continued campaign of the Federal Reserve to push short-term rates higher to dampen inflation pressures.

© Copyright 2005 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email