The housing market experienced one of its strongest quarters in years in Q2, with home prices continuing their upward trajectory. That’s good. But new home sales plummeted in July, falling to their lowest level in nine months. That’s bad.
The Commerce Department said Friday that sales of new homes dropped 13.4% in July, to an annual rate of 394,000 units, well below the expectations of economists. The annual rate for May and June was also revised downward, according to a Reuters report.
The sales drop could show that the recent spike in mortgage rates is damaging the housing recovery.It could also spell trouble for the Fed’s plan to taper bond purchases later this year.
"The higher mortgage rates are having an impact on the housing market," Scott Brown, chief economist with Raymond James, told Reuters. "That makes tapering somewhat less likely."
Construction of new homes, meanwhile, continues to accelerate, rising 4.3% in July from the previous month. At July’s sales rate, it would take 5.2 months to sell the houses currently on the market, according to Reuters. That’s up from 4.3 months in June.
Sales of existing homes spiked in July, rising 6.3% from the previous month. However, National Association of Realtors Chief Economist Lawrence Yun cautioned that rising interest rates could eventually slow those sales as well.
“Mortgage interest rates are at the highest level in two years, pushing some buyers off the sidelines,” Yun said Aug. 21. “The initial rise in interest rates provided strong incentive for closing deals. However, further rate increases will diminish the pool of eligible buyers.”