WASHINGTON -- Sales of new single-family homes in June plummeted to the lowest level in two years as rising interest rates held back buyers in all regions of the United States, the government said yesterday.

The Commerce Department reported home sales slumped 14.1% to a seasonally adjusted annual rate of 591,000, well below analysts' expectations. In addition, the department issued revised figures for the preceding three months showing sales were much weaker than previously reported.

The bond market rallied in response, pushing the yield on the Treasury 30-year bond down to 7.34% as traders concluded that the Federal Reserve is less likely to raise short-term rates again this month. Members of the Federal Open Market Committee meet Aug. 16.

"Underlying economic growth may be weakening now, allowing higher interest rates to take a bite out of housing," said David Berson, chief economist for the Federal National Mortgage Association. "This certainly reduces the chances that the Fed will tighten."

The housing sector accounts for only about 5% of total U.S. gross domestic product. However, housing was an important source of economic growth over the last nine months, creating construction jobs and spurring purchases of furniture and other durable goods by home builders and consumers.

The drop in new home sales followed other recent reports that higher interest rates are starting to take their toll. Last week the National Association of Realtors said sales of existing homes in June fell 3.6% to 3.96 million on declines in all regions of the U.S. Earlier, Commerce said housing starts fell 9.8% during the month on decreases in both single-family and multifamily units.

"The numbers are finally coming home to roost for housing," said Gary Schlossberg, chief economist for Wells Fargo Bank, in San Francisco.

The average 30-year fixed mortgage rate at the end of July reached 8.57%, up sharply from 7.25% a year earlier. The increase has encouraged home buyers to shift to other types of mortgages, but rates for those, too, have gone up. The average rate for one-year adjustable mortgages hit 5.46%, up from 4.55% a year earlier, and the rate on 15-year fixed mortgages reached 8%, up from 6.75%.

Schlossberg said interest rate increases are more of a problem in California, where homes prices remain higher than elsewhere in an economy that is still struggling. He estimated that each increase of one percentage point in rates adds about $105 per month to the monthly payment of a median-priced home in California.

"The tentative recovery has become more tentative," said Schlossberg.

According to the Commerce report, new home sales in the South plunged 19.1% to 254,000 from 314,000, while sales in the Northeast dropped 18.6% to 48,000 from 59,000. Levels for both regions were the lowest since August 1992, officials said. In the Midwest, sales fell 3.4% to 114,000 from 118,000, and in the West sales tumbled 10.7% to 175,000 from 196,000.

Prices of new homes surged, according to Commerce. The median sales price hit $134,900, the highest on record, and the average sales price hit $157,200, the highest since August 1989.

David Seiders, chief economist for the National Association of Home Builders, said low interest rates last year spurred a lot of buying among first-time homeowners, including many with modest incomes. With some of these buyers now out of the market, lower-priced homes may have dropped out of the mix and boosted sales prices, he said.

Any move by Fed officials to raise rates now "would seem pretty outlandish," Seiders said.

However, other analysts said the economy still has plenty of momentum and that a credit-tightening move by the Fed remains a live possibility. More information on the economy and inflation will come with this Friday's July employment report and next week's reports on producer and consumer prices.

Bill Sharp, an economist at Smith Barney Inc., said analysts at the firm expect the Fed to raise short-term rates half a percentage point to 4.75% before FOMC officials finish meeting Aug. 16. Other analysts say an increase to 4.50% is possible.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.