* New home sales fall in July to nine-month low
* Data dims case for Fed to reduce bond buys next month
* Inventories and home prices increase
By Jason Lange
WASHINGTON, Aug 23 (Reuters) - Sales of new single-family homes in the United States fell sharply in July to their lowest level in nine months, casting a shadow over the country’s housing recovery.
Sales dropped 13.4 percent to an annual rate of 394,000 units, the Commerce Department said on Friday.
The reading, which was well below economists’ expectations, could be a sign that a recent surge in mortgage rates is weighing on the economy, although the data is often subject to large revisions.
The report could weaken the case for the U.S. Federal Reserve to reduce its support for the economy by trimming monthly bond purchases later this year.
“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.”
The government revised sharply lower its estimate for new home sales in May and June.
Yields on U.S. government debt dropped sharply and the dollar weakened following the release of the data, a sign that some investors were scaling back bets that the Fed would trim its $85 billion in monthly bond purchases next month.
Mortgage rates have risen sharply since May on bets that the Fed would soon begin tapering its bond purchases. The stimulus program is designed to lower interest rates to make it easier for businesses to expand and take on new workers.
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.
There have been indications that higher borrowing costs are having only a limited impact on the overall housing market.
Sales of existing homes, a much larger category than new homes, surged to a three-year high last month. Some analysts speculated, however, that home buyers rushed into the market to lock in mortgage rates before they rose further.
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.
Rising inventories could slow the rapid and arguably unsustainable price gains seen over the past year. If that occurred in step with a moderate rise in interest rates, the overall housing market could become healthier in the long term.
“(In) the end it will make it the housing recovery a more durable one,” said Lindsey Piegza, chief economist with Sterne Agee & Leach in Chicago.
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.