The National Association of Realtors reported today that sales of existing homes dropped by 0.5 percent from June to July. This followed a downwardly-revised sales drop of 2.8 percent in June.

The sales slowdown is generally attributed to the rise in long-term interest rates since the first of the year. In a recent release, the Federal Home Loan Mortgage Corporation reported that the average rate for a 30-year fixed-rate mortgage was 8.25 percent. This compares with an average rate of 7.03 percent back in January. Interestingly, the surge in housing purchases earlier in the year was attributed to the onset of the rise in long-term rates. Apparently, potential buyers who were sitting on the sidelines were galvanized into action when they began to see the rates go up. Now, it seems that most of those formerly undecided potential buyers have become actual buyers, and that interest rates have reached a level that is putting a damper on home-buying enthusiasm.

Another factor in the slowdown may be that the supply of existing homes for sale is decreasing. From June to July the number of used homes on the market declined from 2.21 million to 2.03 million. At the sales rates for those two months this amounted to a decline in inventory from 6.4 months supply to 5.9 months supply.

Perhaps indicative of the slowdown in demand, the average price for an existing home dropped from $150,200 to $149,400 from June to July.

Higher interest rates are taking their toll on the new home market as well. A couple weeks ago the National Association of Home Builders reported a slowdown in prospective-buyer traffic at new home sites and a drop off in current sales of new homes. At the same time, the Commerce Department reported that, from June to July, building permits for new single-family homes (which account for approximately 3/4 of all new housing structures) were virtually unchanged -- down 1 (+/-1) percent.

Pat Lafferty (MF Merlin)

Transmitted: 8/26/96