WASHINGTON - New home sales climbed unexpectedly in August and growth last quarter was stronger than previously thought, the government reported yesterday, providing more signs of surprisingly strong momentum in the economy.
"It's awfully hard to find any indication the economy is slowing down much," said Lyle Gramley, consulting economist with the Mortgage Bankers Association.
Gramley's assessment came yesterday after the Commerce Department reported that single-family home sales surged 9.7% in August to a seasonally adjusted annual rate of 703,000 units, the highest level in five months. Analysts had expected a sales rate of around 650,000.
August marked the biggest jump in home sales since a 14.4% gain in September of last year, according to a department official.
In a separate report, the Commerce Department said that the economy grew at a revised 4.1% annual rate in the second quarter, previously reported up 3.8%. The upward revision was unexpected but resulted primarily from a previous undercounting of cattle inventories, the department said.
The cow-recount pushed the huge inventory accumulation in the second quarter up even higher to $59.2 billion from the previous estimate of $56.3 billion.
The jump in home sales surprised economists, who said it confirms the view that the housing market will not decline very much this year in the face of higher interest rates. But the report did not significantly erode the view that the housing sector has embarked on a slow downward path.
The Federal Reserve has raised short-term interest rates five times this year, and the housing market is one of the first places where the higher rates are expected to bite.
"Housing is headed down at a modest pace," said Jim O'Sullivan, an economist with J.P. Morgan. "But the main message here is that housing is holding up well."
Monthly home sales in the second quarter were lower on average than in the first quarter, which were down from the fourth quarter of last year, O'Sullivan noted.
He and other analyst also pointed out that the home sales report is notoriously volatile and subject to large revisions. For example, home sales in June grew at a revised rate of 1.9%, previously reported up 8.3%.
Lacy Hunt, chief economist of HSBC Holdings Inc., dismissed the August surge in home sales, predicting the number will be revised down after the government realizes that sales did not grown by 82% in the Northeast as yesterday's report said. "I don't think it happeneed," he said. "Statistically, these numbers are of very poor quality."
Home sales may begin to decline faster than many economists anticipate, Hunt said, citing declining buyer traffic and mortgage applications, coupled with higher mortgage rates.
According to Gramley, 30-year fixed-rate mortgages averaged 8.51% in August, down slightly from an 8.61% average in July, but up significantly from 6.92% a year ago. Rates are on track to average about 8.75% in September, he estimated.
Each percentage point added to a 30-year fixed-rate mortgage adds about $70 to the monthly mortgage payment for a $100,000 home, Gramley said. "Mortgage rates are up almost two full percentage points from their lows; that's significant," he added.
The revision to second quarter gross domestic product came as a surprise to several analysts, but they said it had very little effect on their outlook for the second half of the year.
"Finding some extra cows grazing on a hill doesn't do it," said David Munro, chief economist of High Frequency Economics. He forecasts 3% growth in the third quarter and 4% in the fourth.
Munro and other economists said the Federal Reserve is unlikely to raise short-term interest rates again until mid-October at the earliest, after another set of monthly economic reports have been released.
"We don't have a smoking gun on inflation yet, but we know powder is being packed in the shells," Munro said.
Also yesterday, the Labor Department reported that initial state unemployment insurance claims fell 11,000 to 310,000 in the week ended September 24. This caused the four-week moving average to fall nearly 6,000 to 322,000.
Weekly claims of around 320,000 is very close to full employment, analysts said. Yesterday's report is an indication of future tightness in the labor market, they said.