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New home sales jump
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August 24, 2001: 11:58 a.m. ET
U.S. housing market strength continues in July; durable goods orders fall
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NEW YORK (CNNfn) - Sales of new homes in the United States jumped in July, the government reported Friday, a sign of continuing strength in the housing market, which has been one of the few bright spots in a sluggish U.S. economy.
The Commerce Department reported new home sales rose 4.9 percent in July to a seasonally adjusted 950,000 annual pace, compared with a revised 2.8 percent gain to 906,000 in June. Analysts surveyed by Briefing.com expected home sales to fall to a rate of 918,000.
It was the fastest pace for new home sales since March's 953,000 rate, and the biggest one-month jump since December 2000.
"Housing activity remains quite robust despite the slowing economy, decline in jobs, and faltering stock market," said Steven Wood, economist with FinancialOxygen.
Separately, the Commerce Department also said orders for durable goods – expensive items such as computers and cars – fell 0.6 percent to $182.02 billion after falling a revised 2.6 percent in June. Economists surveyed by Briefing.com expected durable goods orders to fall 0.6 percent.
The closely watched category of non-transportation orders recorded a much steeper decline than expected, falling 1.4 percent. Projections envisioned a 0.6 percent drop.
U.S. equity markets jumped after the home-sales news, while U.S. Treasury bond prices fell.
Click here for CNNfn.com's economic calendar
The gain in home sales likely reflects continued low mortgage rates, combined with relatively low levels of unemployment. The increase in sales should boost consumer spending ahead, as new homeowners begin to furnish their houses.
While July's reading was stronger than the 918,000 rate that Wall Street analysts had been expecting, June and May sales were revised downward. June sales were revised to a 906,000 pace from a previously reported 922,000 rate, while May sales were revised to an 881,000 pace from 907,000.
Consumer spending, which drives two-thirds of the U.S. economy, and housing have offset weakness in business investment this year, keeping the economy in positive territory – if only barely.
In order to keep consumers spending, the Federal Reserve has cut its target for short-term interest rates seven times this year, hoping that lowering borrowing costs will stimulate increased demand and keep the country out of a recession.
Most economists believe the rate cuts, together with $40 billion in advance payments for 2001 tax credit, still being mailed to taxpayers, will help boost demand and allow American manufacturers to halt production cutbacks that have resulted in more than 800,000 job cuts in the past year.
Click here for more on the Fed and rates
Still, the housing market has been so strong for so long that some have wondered how much longer it can last, particularly in the face of mounting job cuts and a slowing economy.
"It's really unprecedented, so you wonder if it can continue," said David Seiders, chief economist with the National Association of Home Builders (NAHB).
Seiders said the NAHB expects construction starts for new homes and new home sales to hold their levels in the second half of 2001, but only if the interest-rate cuts and Congress' recently passed tax cuts are effective in boosting consumer spending and the economy.
"Housing is a highly discretionary purchase, and if people get worried, they could step back and not buy. If they get worried enough, it doesn't matter what the interest rate is," Seiders said. "If the stock market should plunge and the job market has another terrible quarter, we'd have a lot of difficulty holding this performance."
But Seiders said home builders have managed to keep their inventories low, which would lend some stability to the market if the worst happens and consumer confidence wilts. And the national housing market has been remarkably steady since World War II.
"Single-family house prices hardly ever fall on average nationally," said Robert Van Order, chief economist with mortgage lender Freddie Mac (FRE: down $2.10 to $64.30, Research, Estimates), or Federal Home Mortgage Corp. "To get house prices falling nationally, you'd need a really big run-up in mortgage rates, and we won't see that. They'll stay at about 7 percent."
Manufacturing continues to struggle
The news for the nation's manufacturing sector, on the other hand, continues to be bad. Orders for durable goods, items expected to last three or more years, have fallen in three of the past four months as manufacturers continue to struggle with a mountain of unsold products.
"[Friday's] data clearly indicate that U.S. manufacturing may not be quite at a bottom. The weakness is led by computers and electronic equipment, but other categories are weak also," said Mary Webb, economist at Scotia Capital Markets in Toronto.
Orders for transportation equipment rose 1.3 percent, led by a 3.8-percent gain in orders for motor vehicles and parts, a positive sign for the key automobile sector. But orders for several categories of business equipment fell.
July's weakness was led by a 4.4-percent drop in new orders for computers and related high-tech products. Demand for semiconductors fell a whopping 12.4 percent.
However, within the broad computer category, companies making communication products reported a hefty 18.3-percent increase in orders, only the third rise this year, and the biggest gain for this sector in 13 months. 
-- from staff and wire reports
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