Sales of new U.S. single-family homes plunged to a 6-1/2-year low in July as persistently high mortgage rates and house prices further eroded affordability.

The report from the Commerce Department on Tuesday added to a stream of weak housing data, and suggested that the Federal Reserve's aggressive monetary policy tightening campaign to slow the economy in order to tame inflation was achieving some desired results in the housing market. But with house prices remaining elevated amid a critical shortage of previously owned properties, a total housing market collapse is unlikely.

"The Fed is getting what it wants," said Matthew Walsh, an economist at Moody's Analytics in West Chester, Pennsylvania. "The housing market needed to cool, and higher interest rates were the only thing that was going to accomplish that."

New home sales tumbled 12.6% to a seasonally adjusted annual rate of 511,000 units last month, the lowest level since January 2016. June's sales pace was revised down to 585,000 units from the previously reported 590,000 units.

Sales rose in the Northeast, but dove in the West and the Midwest as well as the densely populated South.

Economists polled by Reuters had forecast that new home sales, which account for 9.6% of U.S. home sales, would decrease to a rate of 575,000 units.

Sales dropped 29.6% on a year-on-year basis in July. They peaked at a rate of 993,000 units in January 2021, which was the highest level since the end of 2006.

Data last week showed single-family housing starts plumbed two-year lows in July, while home resales fell to levels last seen in May 2020. The National Association of Home Builders/Wells Fargo Housing Market sentiment index fell below the break-even level of 50 in August for the first time since May 2020.

The Fed has hiked its policy rate by 225 basis points since March. Fed Chair Jerome Powell's address on Friday at the annual Jackson Hole global central banking conference in Wyoming could signal how much further the U.S. central bank needs to tighten monetary policy.

Overall economic activity is slowing in response to the stiffest run of interest rate increases since the 1980s.

A survey from S&P Global on Tuesday showed its measure of private sector business activity falling to a 27-month low of 45 in August from 47.7 in July. A reading below 50 indicates a contraction in activity.

But the second straight monthly decline, which was concentrated in the services sector, probably exaggerates the emerging softness in the economy.

The Institute for Supply Management survey, which has a longer history than the S&P Global survey, showed the services sector growing at a strong clip in July. Underlying retail sales were also solid last month.

"We would not take weaker S&P services PMI alone as a signal that near-term recession risks have risen, as third-quarter hard activity data have generally been somewhat more positive in recent releases," said Veronica Clark, an economist at Citigroup in New York. "We generally see ISM services as a more reliable indicator of real activity patterns."

Stocks on Wall Street were mixed. The dollar slipped against a basket of currencies. U.S. Treasury prices rose.

HIGHER MORTGAGE RATES

Mortgage rates, which move in tandem with U.S. Treasury yields, have soared, with the 30-year fixed-rate mortgage averaging 5.13%, up from 3.22% at the start of the year, according to data from mortgage finance agency Freddie Mac.

Despite slowing demand, house price growth remains strong. The median new house price in July was $439,400, an 8.2% jump from a year ago. While that was a deceleration from the double-digit growth seen early in the year, average house prices jumped 18.3% year-on-year in July.

None of the houses sold last month were below $200,000.

"Significant price decreases will be needed keep a floor under new homes sales," said Matthew Martin, a U.S. economist at Oxford Economics in New York.

There were 464,000 new homes on the market at the end of last month, the most since March 2008 and up from 450,000 units in June. Houses under construction made up 67.2% of the inventory, with homes yet to be built accounting for 23.1%.

With builders facing a multitude of challenges, including supply constraints, some of these houses will probably not be built. Completed houses accounted for 9.7% of the inventory, well below a long-term average of 27%.

"There remains a structural and long-term shortage in the housing market," said Odeta Kushi, deputy chief economist at First American Financial Corporation in Washington.

At July's sales pace it would take 10.9 months to clear the supply of houses on the market, up from 9.2 months in June.

The raft of weak housing data left economists expecting that residential investment would contract again this quarter after declining at its sharpest pace in two years in the second quarter.