New Home Sales Surge 6.1% to Near-Record Pace

near-record June level, which suggests that housing will help speed growth in the second half. New home sales rose to a seasonally adjusted annual rate of 819,000, in line with analysts' expectations. That followed a 1% rise in May, considerably less than the Commerce Department's initial estimate of 7.4%. With mortgage rates now at the lowest point in more than a year, builders anticipate continued gains in the months ahead. "Nothing lasts forever, but the way the economy is running feels good, and I don't see it taking any abrupt turns," said Robert Strudler, chief executive officer of Houston-based U.S. HomeCorp., one of the nation's largest home builders. The report puts the annual sales pace at 805,000 homes for the first six months of the year, up from 757,000 sold in 1996, but below 1977's record 819,000. All signs point to continued gains for housing and the overall economy, analysts said. "You've got high confidence, low unemployment, solid income growth, and a powerful wealth effect," said Stephen Roach, chief economist at Morgan Stanley in New York. That sets the stage for faster growth in the second half of the year-about 3.5% annualized, Mr. Roach said. Driven by the fall in interest rates that lures buyers and reduces costs for builders, optimism is running high. "There's a euphoria out there, with the stock market setting records and inflation staying low," said Scott Campbell, director of investor relations at Pulte Corp. in Bloomfield Hills, Mich. Between July 21-the day before Federal Reserve Chairman Alan Greenspan pronounced the economy on an"exceptional" path of good growth and low inflation- and Wednesday, the Standard & Poor's home builders index had risen 23%, while the S&P index of 500 stocks had risen just 4%. Mr. Greenspan's remarks also sparked a rally in the Treasury bond market. Wednesday's home sales report showed a key gauge of consumer demand-the supply of homes for sale nationwide-decreased by 0.4% in June to an annual rate of 282,000. The inventory of vacant homes fell to a 4.2-month supply, the lowest since July 1971. That's a sign "builders are very cautious about how long good times can last, and they're running a hand-to-mouth operation," said economist Samuel Kahan of ASK Financial Research in Chicago. Still, other analysts view lean inventories as a hint builders will soon start a flurry of new construction projects to meet demand. Housing starts rose 4.8% in June, the first gain since April, and builders say foot traffic is on the rise. "We're seeing a lot of interest for the whole range of our homes," said Lori Steiner, vice president of Dublin, Ohio-based Dominion Homes. Ryland Group Inc. of Columbia, Md., said its new orders rose 12%, to 2,310 houses in the second quarter. Though the gain in home sales follows an increase in employment, incomes, and stock market values, "the most significant economic news that we see translate into new orders is consumer confidence," said Ryland vice president Susan Cass. "Strong confidence can even overcome small blips in interest rates."