New Home Sales Drop 5.8% in April

Many economists expect the housing market to cool further in coming months.
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Updated from 11:10 a.m. EDT

Sales of new homes dropped sharply in April to the lowest level since November, echoing other evidence of slowing home sales across the country as mortgage rates continue to rise.

New home sales fell 5.8% in April to a seasonally adjusted 909,000 annual rate, the

Commerce Department

reported Wednesday following an upwardly revised 5.8% rise in March. Sales in April were significantly lower than the 3.2% drop to a 937,000 annual pace that economists had been expecting, according to a

Reuters

poll.

Year-over-year, new home sales were down 2.3% in April.

While the data indicates that housing markets are feeling the pinch of higher mortgage rates and the recent sell-off in technology stocks, new home sales continue to remain near historically high levels. New home sales in March have been revised to a 5.8% increase from an originally-reported 4.5% pace. The revised March figure was the second-highest on record.

A separate grouping of economic data designed to forecast future economic activity, known as the index of leading indicators, also dipped in April. The decline indicates that the broader economy might be slowing as well, according to the

Conference Board

, a private trade group.

The news is likely to comfort economists and policy makers, who have been looking for signs that the economy is slowing in response the

Federal Reserve's

year-long effort to raise interest rates. But anecdotal evidence indicates that the demand for homes in some of the hottest U.S. markets is still outpacing supply, and that home prices in those markets are

still rising, even as sales are slowing. Indeed, the report showed that the average price for a new home rose to $208,000 in April from $202,300 in March.

But another measure of pricing in the new home sales data Wednesday provide some of the first evidence that the balance between higher-priced and lower-priced homes may be moderating. The Commerce Department also reported that the median sales price, the level at which half of the sample of homes are priced higher and half lower, dipped to $161,400 in April from $165,000 in March.

The disparity between rising average prices and lower medians "implies that an increasing number of less expensive homes were sold but those who bought high-priced houses really paid a bundle for them," said Joel Naroff, president of

Naroff Economic Advisors

.

Most economists say higher mortgage rates are having the largest influence on the slowing housing market, quelling demand as the cost of financing goes up. According to mortgage giant

Freddie Mac

, the Fed's most recent increase in short-term rates on May 16 pushed mortgage rates sharply higher. The rate for a typical 30-year fixed-rate mortgage stood at 8.62% last week, compared with an average 8.15% for April, and 7.15% in May 1999.

Many economists expect the housing market to cool further in coming months, as higher mortgage rates continue to give buyers cold feet.

"Housing is clearly beginning to respond to higher mortgage rates," said Bruce Steinberg, chief economist at

Merrill Lynch

. "Mortgage rates have jumped during the past month and further declines in housing activity will almost certainly occur."

Regionally, new home activity slowed most in the Midwest, where sales dropped 15.5% to a 153,000 pace. In the West, sales also fell by a sharp 11.5% to a 246,000 rate and sales in the South dipped 0.7% lower to 422,000 units. Northeast home sales rose 8.6% to 88,000 units

Meanwhile, the index of leading indicators dipped 0.1% in April, following a 0.1% increase in March and a 0.3% decline in February. The index, now at 106.0, is measured relative to a 1996 level of 100.

"The data suggest that some sectors may be beginning to respond to Fed tightening," said Ken Goldstein, economist at the Conference Board.

Additional data from the industry-heavy Chicago area also pointed to slower manufacturing activity. The

Purchasing Management Association of Chicago

reported its index of business activity fell to 53.9 in May from 56.5 in April. While an above-50 reading denotes growth in economic activity, the data suggested that the rate of growth has slowed significantly.

The index, which showed slower acceleration of key components such as raw-materials prices, is closely watched as a forecaster for overall U.S. manufacturing activity, which will be illustrated Thursday in a report from the

National Association of Purchasing Managers

.