Smith Faculty Opinion Article	August 23, 2006
By Dr. Peter Morici, Professor of International Business EMAIL WEB SITE

New Home Sales Drop 22 Percent in July from 2005

Today, the Commerce Department reported new home sales were 1.072 million in July. This was a decrease of 4.3 percent from June and 22 percent from July 2005.

Prices for new homes fell 1.7 percent from June, and builders are offering many extras to entice buyers. Overall, values are falling and builders profits are threatened.

Along with the recent drop in existing home sales, the precipitous decline in new home sales indicates builders are under pressure, and the economy is likely slowing more than the Federal Reserve anticipated at its August 8 interest rate setting meeting.

This begs the questions: Is the economy sailing into just headwinds or a hurricane? Has the Federal Reserve already raised interest rates too much?

Inflation is likely to stay high for another month or two, until slowing growth can begin to bite on business pricing decisions. Right now, many businesses are too aggressive about pricing, and this may actually drive down growth more quickly than forecasters are anticipating.

Ben Bernanke will have to exhibit considerable courage to ride the storm out. The temptation to raise interest rates could result in a terrible bout with stagflation or a recession.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.