Why the new homes plunge doesn't tell the full story

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Don't let the sharp plunge in new home sales mislead you: it's a tale of two housing markets, says one investor.

"What we're learning about the housing market over here is that it's really bifurcated in that you have a lot of private-equity type money and more leveraged-type money buying up some of the older houses that have been in foreclosure, short sales," said Yra Harris, partner at Praxis Trading.

This sizable investment has propped up sales of existing homes in the U.S. to their highest level in more than three years. But homes fresh to the market aren't faring nearly as well, new data showed on Friday, casting a shadow over the country's housing recovery.

"The new housing market where they're not as involved is showing a different pattern," Harris said.

New home sales drop

Sales of new single-family homes in the United States fell sharply in July to their lowest level in nine months. They dropped 13.4 percent to an annual rate of 394,000 units, the Commerce Department said on Friday.

(Click here to track the U.S. stock market reaction following this economic release.)

While government housing data is often subject to large revisions, the reading was well below expectations and could be a sign that a recent surge in mortgage rates is weighing on the economy.

The data could weaken the case for the U.S. Federal Reserve to reduce its support for the economy by the end of the year. It also casts doubt on Wall Street expectations that the Fed will begin reducing monthly bond purchases next month.

"The higher mortgage rates are having an impact on the housing market," said Scott Brown, chief economist with Raymond James in St. Petersburg, Florida. "That makes tapering (bond purchases) somewhat less likely."

Yields on U.S. government debt dropped following the data's publication.

Mortgage rates have risen sharply since May on bets that the Fed will begin reducing its bond purchases soon. The program aims to lower interest rates to make it easier for businesses to expand and take on new workers.

Positive housing signs

The housing market, which has been a major drag on the U.S. economy since the 2007-09 recession, appeared to turn a corner early last year when home prices began to rise.

Last month, the median price for a new home sale rose to $257,200, up from $237,400 in the same month of 2012.

Construction of new homes has accelerated over the last year, and the inventory of new homes for sale increased by 4.3 percent in July from June.

But higher interest rates could be taking some of the air out the recovery. The government revised sharply lower its estimate for new home sales in May and June.

At July's sales pace it would take 5.2 months to clear the houses on the market, up from 4.3 months in June. A supply of six months is normally considered a healthy balance between supply and demand.