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Jump in mortgage rates hurts US sales of new homes

The increase in mortgage rates has begun to steal some momentum from the market.Jewel Samad/AFP/Getty Images/file 2013

WASHINGTON — Americans cut back sharply in July on their purchases of new homes, a sign that higher mortgage rates may be slowing the housing recovery.

US sales of newly built homes dropped 13.4 percent to a seasonally adjusted annual rate of 394,000, the Commerce Department said Friday. That's the lowest in nine months. And sales fell from a rate of 455,000 in June, which was revised down from a previously reported 497,000.

The housing rebound that began last year has helped drive economic growth and create more construction jobs. But mortgage rates have climbed a full percentage point since May. The increase has begun to steal some momentum from the market.


Sales of new homes are still up 7 percent in the 12 months ended in July. Yet the annual pace remains well below the 700,000 that is consistent with a healthy market. July's drop ''may mark an uh-oh kind of moment for the housing recovery,'' said Mark Vitner, an economist at Wells Fargo Securities.

Stocks of home builders declined sharply Friday, even as overall market indexes rose. Shares of Toll Brothers Inc., D.R. Horton Inc., and Lennar Corp. — three of the nation's largest builders — all fell in the neighborhood of 3 percent.

And major homebuilders' shares have been dropping steadily since late May. The slide began after Federal Reserve chairman Ben Bernanke first signaled that the Fed might reduce its bond purchases later this year. The bond purchases have helped keep mortgage rates and other borrowing costs low.

The average rate on a 30-year mortgage reached 4.58 percent this week, according to Freddie Mac. That's up from 3.35 percent in early May and the highest in two years.

The impact on would-be buyers' finances is significant.

Take someone who locked in the early May rate on a $200,000 mortgage. They would have a monthly payment of around $875. But the same mortgage at last week's average rate would cost $1,025 a month.


The difference adds up to $150 more each month — or $54,000 over the lifetime of a 30-year loan. The monthly figures don't include taxes, insurance, or initial down payments.

Potential buyers appear to have noticed that financing a home purchase has become more expensive. The number of Americans applying for mortgages to buy homes has plummeted 16 percent since the end of April. And builders began work on the fewest single-family homes in eight months in July. Still, mortgage rates remain low by historical standards. The same $200,000 loan would cost a buyer $1,330 a month at a 7 percent rate, the average since 1985.

Most economists expect the housing recovery will continue, albeit at a slower pace.

The impact of higher mortgage rates has surfaced in the new-home market faster than the resale market because the new-home sales are measured when contracts are signed.

Higher rates may have also caused potential buyers to cancel some purchases of new homes. Vitner said that may explain why sales were revised down in May and June. Most of the revisions occurred in sales of homes not yet under construction. Buyers don't need mortgages until construction begins.