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New home sales set record
Report shows market still hotter than bullish forecasts, but prices starting to show softness.
July 27, 2005: 11:34 AM EDT
By Chris Isidore, CNN/Money senior writer
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NEW YORK (CNN/Money) - New home sales rose to record levels in June, according to a government report released Wednesday that put the latest reading of real estate market strength above Wall Street expectations.

The Census Bureau report showed that new single-family homes sold at a record 1.374 million pace in June, up 4 percent from 1.32 million in May, a figure that was revised higher to what would have been a record at that time.

Economists surveyed by had forecast a 1.30 million annual sales pace for June, which would have been little changed from the original May reading.

The strong new home sales report follows a record level of existing home sales in June reported by the National Association of Realtors on Monday.

While new home sales represent a fraction of the overall real estate market, the report is closely watched because it is a more current reading than the existing home sales report for the same period. New home sales data is collected at the time that a sales contract is entered, while the existing home sales reading is based on when a home sale is closed, generally a month or two later in the sales process.

The new home sales were likely supported by low mortgage rates. According to mortgage financing firm Freddie Mac, the average 30-year fixed-rate mortgage fell to 5.58 percent in June, the lowest average since March 2004. While rates have risen so far in July, they still are low by historic standands.

Decline in prices

The median new home price declined 5.5 percent from May to $214,800. Median represents the price at which half the homes sell for more and half sell for less.

The median price is roughly unchanged from year-earlier levels, but it's down almost 10 percent from the record of $237,300 reached in March.

The average price, which is generally higher due to the price of upper-end homes, also fell 7 percent from May and almost 8 percent from February's high.

Economists have been watching for signs that home values represent an overvalued "bubble" that could burst and lead to a sharp decrease in prices. Federal Reserve Chairman Alan Greenspan warned in Congressional testimony last week that while he didn't see a bubble in the national housing market, that prices were likley becoming unsustainable in a number of local markets, causing the national real estate market to show signs of "froth."

But Jason Schenker, economist with Wachovia Securities, said that some of the new home price decline was likely due to a drop in the cost of raw materials such as lumber and steel, which hit their own highs in February. Existing home prices, which are far less influenced by building material costs, continued to show gains in Monday's report on those sales.

Schenker said he doesn't see the new home price decline as a sign that the market is getting flooded or that there is a bubble in new home prices that is in the process of bursting.

"I don't know if this is the end," he said. "I think we could potentially see more sales gains from these record levels. Mortgage rates have remained low and investors have continued to shy away from equities and moved to more tangible assets, like real estate."

The supply of new houses on the market slipped to an estimated 4 months, according to the report, the tightest supply since last October, which could help support prices.

But that supply estimate is calculated by comparing the number of homes on the market to the current sales pace. A slowing from the current record rate of sales could quickly swell the estimate for supply. The number of homes on the market is actually up 2.4 percent from May and up more than 10 percent from October, the last time the monthly supply estimate was lower.

For more on the real estate market and what it means to you and your investments, click here.  Top of page


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