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Home sales sizzle in May, but the median price drops

By wire services
Published June 25, 2005

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

The median price of the homes sold fell sharply, however. Analysts blamed the decline on a change in the regional makeup 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 new and existing homes would remain strong through the summer with home prices continue 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 begin to rise, something that has not occurred 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 to a 1.31-million sales pace set in October.

The median 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 (down 24.5 percent), where homes are more expensive, and a big rise in sales in the Midwest (up 22.9 percent), where homes are cheaper. New home prices set a record of $237,300 in February.

Sales were up 1.7 percent in the West, but were down 0.8 percent in the South.

Mark Vitner, senior economist with Wachovia Corp. in Charlotte, N.C., and a longtime observer of Florida's economy, said the report doesn't portend a slowdown in the housing boom, let alone a burst bubble.

Although the Commerce Department did not break down sales price by region, Vitner said it's likely that almost all the downward movement on prices came from the Northeast. A wet May in that region affected sales, he said, and a reduction in lumber prices is showing up in slightly lower sales prices.

In the Southeast and Florida, in particular, Vitner said talk of a bubble is premature.

"We haven't seen any sign of a moderation in prices as of yet," he said. "At the end of the day, home sales are very close to a record level . . . and likely to be incredibly strong throughout this year."

If anything takes "froth" out of the market, Vitner predicted it will be regulatory pressure to tighten lending requirements this year.

The strong new home sales followed a report Thursday that sales of previously owned homes totaled 7.13-million units at an annual rate in May, a slight decline from the record April pace, but still the second-fastest sales rate on record for existing homes. The median sales price of existing homes continued rising in April to hit a record of $207,000.

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 runup 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 was a gradual slowing in sales and price increases 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.

"I think there are bubbles in some cities, but nationally we won't see a big home price decline, but we are not going to see continued home price increases of 10 percent a year either," said David Wyss, chief economist at Standard & Poor's in New York.

Times staff writer Jeff Harrington contributed to this report, which used information from the Associated Press.

[Last modified June 25, 2005, 00:34:16]