Video: Real estate bubble ready to pop?

msnbc.com news services
updated 5/25/2005 3:17:01 PM ET 2005-05-25T19:17:01

Sales of new homes rose unexpectedly in April, climbing 0.2 percent to a fresh record, a government report showed Wednesday.

The Commerce Department said new single-family home sales rose to a seasonally adjusted annual rate of 1.316 million units, a record, from a downwardly revised rate of 1.313 million in March.

Wall Street analysts had expected April sales to decline 0.1 percent to a 1.350 million rate, from the previously reported 1.431 million pace. Deep revisions cut the March sales rise to 4.5 percent from the previously announced 12.2 percent jump.

The national median sales price for a new home rebounded to $230,800 in April from $217,500 in March. The average price was unchanged at $283,500.

"The data confirm that the housing market is still very hot and that housing is still an important, strong sector of the economy," said Gary Thayer, chief economist for A.G. Edwards & Sons in St. Louis.

Inevitably the stepped-up pace revived talk of a housing bubble, especially after Tuesday's report of an increase in sales of existing homes .

Jack Guynn, president of the Federal Reserve Bank of Atlanta, warned that speculators who are gambling that housing prices will soar indefinitely are bound to get hurt.

“There are some local markets, especially in coastal Florida, where I’ve heard stories for more than a year about behavior that’s got to be characterized as nothing other than speculation,” Guynn said in response to questions after addressing a home builder’s group in Atlanta.

“It makes me very uncomfortable,” he said. “Some buyers, some builders, some lenders are going to get burned, could very likely get burned, in some of those local markets.”

Guynn’s remarks seemed closely coordinated with a caution that Fed Chairman Alan Greenspan offered last week to Americans who speculate in real estate.

On Friday, Greenspan said he saw signs of “froth” in housing markets though he did not characterize it as a worrying national issue. “We don’t perceive that there is a national bubble but it’s hard not to see ... that there are a lot of local bubbles,” Greenspan told a group in New York.

Major Market Indices

Although the new-home sales rate edged up to a record, the downward revision for March eased some concerns.

Video: Bubble trouble? "The surge in March in new-home sales seemed at odds with more moderate strength in other indicators, and the new March numbers make more sense," said Michael Englund, chief economist at Action Economics.

In another positive sign for the housing market, mortgage applications rose last week, boosted in part by an increase in refinancing activity as long-term rates fell slightly.

“Even though the Federal Reserve is in a tightening cycle, longer-term mortgage rates are holding steady at near historic lows,” said Bob Walters, chief economist at online lender Quicken Loans,  according to National Mortgage News.

“That’s creating tremendous opportunities for people purchasing a new home or refinancing their existing mortgage," he said. "Low rates are fueling the housing market and should keep the number of purchases and refinancings at very healthy levels."

Thayer said the Fed faces a policy dilemma if it wants to prevent the housing market, where prices are rising so fast that interest rates are having little impact.

"Even though the Fed has raised short-term rates eight times over the last year it hasn’t been enough  enough to dampen the housing market yet," Thayer said.

While the Fed has raised short-term interest rates, longer-term rates that affect 15- and 30-year mortgages have barely budged in the past year, surprising some Fed officials including Guynn.

“I’ve certainly been among those that’s been surprised that the usual pattern of longer-term rates at least partially following short term rates up has not shown itself this time,” Guynn said.

One possible explanation is that financial markets believe inflation will remain low so they may be adding in a smaller “inflation premium” to longer-term loans, Guynn said, adding, “If that’s the case, it’s a very happy development.”

New-home sales surged 37.2 percent in the Northeast last month, reversing a 4.9 percent fall in March, and the West recorded a 2.8 percent sales pickup. The South and Midwest both saw sales cool in April, falling 5.3 percent and 0.5 percent respectively.

Reuters contributed to this report.

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