New-home sales rise to record Low interest rates help fuel May surgeThe economy

June 30, 1998|By BLOOMBERG NEWS

WASHINGTON -- Sales of new homes forged ahead in May to a record level against a backdrop of low interest rates and high consumer optimism that will power the industry through year's end.

Sales of new single-family homes rose 0.3 percent in May, to 890,000 units at an annual rate, the Commerce Department said yesterday, breaking the record set in April. Analysts had expected a drop in May sales to an 877,000-unit annual rate.

"It's so good that it's scary," said Robert Toll, chairman and chief executive officer at luxury homebuilder Toll Brothers Inc. in Huntingdon Valley, Pa. "We're enjoying a fabulous market, and I would expect it's going to continue as long as the economy is supportive. It seems as though we're in for another good few years."

Low mortgage rates, a key incentive for homebuyers, have held below 7.25 percent since October. For the past two weeks, the average rate on a 30-year fixed-rate mortgage has been below 7 percent. The number of people applying for mortgages rose for the fourth week in a row during the week ended June 19, the Mortgage Bankers Association said. It takes about three months for changes in mortgage rates to affect home sales, a sign that "there is more strength to come," said Ian Shepherdson, chief economist at HSBC Securities Inc. in New York.

Because housing is such a large part of the economy, the industry's strength will help offset a slowdown at U.S. factories expected from weak Asian economies and the nationwide shutdown at General Motors Corp. plants, Toll said.

Housing's strength has been defined by the longest stretch ever of new-home sales exceeding an 800,000-unit annual pace. May was the ninth straight month the pace of sales was above that level.

Sales of new one-family homes in the first quarter averaged 855,000 a month at an annual rate, a record and up 3.3 percent from the 828,000 average per month in the fourth quarter.

"We've just got great affordability," said Robert Strudler, chairman and chief executive officer at U.S. Homes Corp. in Houston. "It's a wonderful combination of full employment, low interest rates and a high degree of consumer confidence."

New-home sales rose 15.7 percent in the West, to a 265,000 rate, the strongest pace since September 1979. "The West is doing some catch-up activity," said Paul Taylor, senior economist at America's Community Bankers. Heavy rains earlier in the year stalled the housing industry in the West.

In the Northeast, new-home sales rose 3.3 percent, to a 94,000 rate, the highest since a similar pace in March 1997. In the South, they fell 6.7 percent, to a 390,000-unit annual rate, and in the Midwest they fell 4.1 percent, to a 142,000 rate.

The number of new homes for sale during May rose to 289,000, a 3.9-month supply and low enough to keep builders busy for the rest of this year, according to analysts.

"My sense is that the homebuilders like to be at 4.5 months' supply," Taylor said. "We're going to see some inventory rebuilding over the summer. So, we'll expect to see starts activity very solid."

Prices of new homes sold rose in May. The median, the price at which half of the homes sold cost more and half cost less, rose to $149,900 last month from April's $146,200. Prices have risen in some areas of the country, notably in California, but the rise primarily reflects consumers who are trading up to more expensive homes and is not a signal of inflation, Taylor said.

Pub Date: 6/30/98

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