New home sales surge, but prices fall

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Market update

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The 2.1 percent increase in sales of new homes in May was much better than the 0.3 percent increase that analysts had been forecasting. However, April sales were revised significantly lower to show a decline of 0.1 percent rather than an original estimate of a 0.2 percent increase.

The sales pace of 1.3 million units was surpassed only by a 1.31 million unit sales pace hit last October.

The 6.5 percent drop in the median sales price for a new home marked the second decrease in the past four months. New home prices hit an all-time high of $237,000 in February.

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The reports this week on new and existing home sales come at a time when analysts are worried that the housing market in some parts of the country is being driven by speculative fever.

Federal Reserve Chairman Alan Greenspan has talked of “froth” in local markets that have seen sizable run-ups in prices over the past year. He has also expressed concerns that home buyers are using types of mortgages that let them purchase more expensive homes with less of a downpayment, leaving them vulnerable if prices do fall sharply.

In the orders report, demand for non-defense capital goods excluding aircraft fell by 2.3 percent in May, the biggest drop since last October. This category is closely watched for signs it can give of business plans to invest in new equipment to expand and modernize.

Economists have grown worried about whether manufacturing, the hardest hit sector in the 2001 recession, could be showing signs of faltering again as businesses grow more cautious in the face of a renewed surge in oil prices.

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