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New home sales plunge. Is the housing recovery slowing?

New home sales fell a whopping 13.4 percent in July, an unexpected drop that has darkened the sunny outlook for the US housing recovery. Climbing mortgage rates and higher prices could be to blame. 

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Mike Groll/AP/File
A construction worker drills on the roof of a new home in New Paltz, N.Y. last month The Commerce Department reported on Friday, Aug. 23, 2013, that new home sales for July plunged an unexpected 13.4 percent from June.

Sales of new single-family homes took a big slide in July, according to the US Census Bureau. Sales dropped 13.4 percent from June to a 394,000 annualized pace, their lowest level in nine months. The figure was well below analysts’ expectations of a 490,000 pace.

The dip casts a pall over the US housing recovery following a recent spate of encouraging data. June’s new home sales numbers, which had hit a five-year high, were revised sharply downward (along with May's). Earlier this week, July’s existing home sales report was impressive, surging 6.5 percent from June and 17.2 percent from a year ago. Year over year, new home sales were still up 6.8 percent from July 2012.

Why the huge monthly drop? Favorite culprits of many analysts are accelerating prices, surging mortgage rates, and a gulf between reported homebuilder optimism and actual construction activity.

“The reported plunge in July, combined with downward revision to earlier data, stand in stark contrast to the recent strong gains in the homebuilder survey,” says Joshua Shapiro, chief US economist with MFR, Inc., in an e-mailed analysis.  “While the July result might prove to be an outlier, it is certainly a warning signal that conditions in the housing market are nowhere near as rosy as homebuilders, real estate agents, and their enablers in the media are so keen to represent.”

Prices for new homes also slid slightly, edging down to an average $257,200 in July from $258,500 in June. Still, that’s up from $237,400 in July 2012 – an indication that the market for new homes is still growing, albeit more slowly than anticipated.

It's too early to tell if July is just a negative blip in an otherwise positive trend. If August numbers confirm the slowdown, then analysts will begin focusing more intently on the potential effects of the bounce in mortgage rates and a possible pullback (or "tapering") in the US Federal Reserve's program to keep interest rates low.

“Data from the Mortgage Bankers Association show that mortgage applications for home purchase have weakened in recent months, suggesting that higher interest rates are having an impact on individual demand for homes, and also highlighting the fact that speculative demand continues to be the main driver of the existing home market,” Mr. Shapiro writes. 

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