New Homes Selling At Hottest Pace Since 1978 First Quarter Numbers Pose Questions And Concerns For Inflation-Wary Financial Markets

New homes sold in the first quarter at the fastest pace in nearly two decades, the government said Monday in the first of a series of economic reports under scrutiny this week by inflation-wary financial markets.

In the final month of the period, March, sales actually slipped a bit - 2.5 percent to a seasonally adjusted annual rate of 813,000, the Commerce Department said. But it was a modest decline from an 11-year high of 834,000 in February and 825,000 in January.

And it was the first time since 1978 that the sales pace topped 800,000 for three consecutive months.

“You had a really wonderful combination of relatively low interest rates and a robust economy generating solid job gains,” said economist David Lereah of the Mortgage Bankers Association of America. “So consumers had a healthy appetite for buying new homes.”

Stock prices advanced, with the Dow Jones average of industrial stocks rising 44.15 points to 6,783.02. But trading was hesitant as investors awaited a passel of reports with the potential to seal Federal Reserve policy-makers’ conviction they need to prevent an outbreak of inflation by raising short-term interest rates at their meeting in three weeks.

The Labor Department was scheduled Tuesday to release its Employment Cost Index, measuring Americans’ wage and benefit gains, for the first quarter. It was viewed as a critical report since Federal Reserve policy-makers have said they’re concerned about wage pressures spilling into product price increases.

Also due this week is the government’s first look at overall economic growth in the first quarter - expected at a robust 4 percent annual rate - and the unemployment rate for April.

By week’s end, the Fed will have more than enough evidence to justify a second quarter-point tightening of interest rates at its May 20 meeting and probably another in July, analysts said. The first increase in more than a year came on March 25.

“We may have to cool the economy down more rapidly than a lot of people anticipate so I think we should be expecting higher rates,” said economist Sung Won Sohn of Norwest Corp. in Minneapolis. “It’s not going to be pleasant.”

Eventually, higher rates will cool the housing market, but not immediately, economists said. Strong sales so far this year have reduced the inventory of unsold new homes at the end of March to 297,000, the lowest in nearly three years. Builders will be busy for some months replenishing the backlog. And sales will be helped this month and perhaps next month by buyers moving to beat further mortgage rate increases.

“But by the third quarter, the housing sector will be turning into a drag on the economy,” said economist David Seiders of the National Association of Home Builders. “It will be a kind of orderly retreat, not a serious old-style housing downswing.”

Thirty-year, fixed-rate mortgages hovered below 8 percent in March but moved above that mark in April for the first time in six months. Seiders said they likely would not move higher than 8-1/4 percent on a sustained basis.

The small new home sales dip in March was led by a 16.1 percent decline in the Northeast, to an annual sales pace of 94,000 homes. Sales fell 10.5 percent in the South to 351,000. But they rose 17.7 percent in the West to a 246,000 rate, the highest since November 1993, and 2.5 percent in the Midwest to 123,000.

The median price of a new home, meaning half sold for more and half for less, was $142,500 in March, up 4 percent from a year ago.