WASHINGTON — Purchases of new U.S. homes fell sharply in July, a sign that higher mortgage rates may be weighing on the housing recovery.
The Commerce Department said Friday that sales of newly built homes dropped 13.4 percent to a seasonally adjusted annual rate of 394,000, the lowest pace in nine months and down from a rate of 455,000 in June.
New home sales have risen 7 percent in the 12 months ending in July. The annual pace remains well below the 700,000 that is consistent with a healthy market.
The housing market has been one of the strongest performers this year in an otherwise sluggish economy, helped by steady job gains and low mortgage rates. But mortgage rates have risen a full percentage point since May and have started to steal some of the market's momentum.
"The spike in mortgage rates is slowing the pace of improvement," said Dan Greenhaus, chief global strategist for institutional brokerage BTIG. "Given the speed at which housing was improving, and the growing talk of a renewed bubble, some moderation, assuming it doesn't materially worsen, is not a terrible outcome."
In July, builders began work on the fewest single-family homes in eight months. And mortgage applications from potential buyers have fallen since rates have risen more than a full percentage point.
The impact of higher mortgage rates has surfaced in the new home market faster because the July sales report reflects signed contracts. Sales of previously occupied homes reached a nearly four-year high last month. But that report measured completed sales, which typically reflects mortgage rates locked in a month or two earlier.
Most economists expect the housing recovery will persist, as mortgage rates remain relatively low by historical standards. The average rate on a 30-year mortgage this week was 4.58 percent, according to Freddie Mac.
Slower sales pushed up the supply of new homes for sale to 171,000 at the end of July, the most in more than two years. Tight supplies of new and previously owned homes have led to sharp price increases. An increase in the supply could moderate those price gains.