New home purchases in the U.S. during July plummeted 13.4%, the biggest drop in over three years. This has raised concern that higher mortgage rates could slowdown the rebound of the real estate market.

The annualized pace for sales fell to 394,000 according to figures from the Department of Commerce in Washington. The latest reading was the weakest since last October and lower than all of the projections of more than 75 economists that were surveyed by a large news agency.

A spike in the cost of borrowing over the last 90 days might be prompting potential buyers to hold off. This highlights the difficult job the Federal Reserve has going forward as they attempt to wean the U.S. economy from their monetary stimulus, while attempting to sustain growth.

The drop in demand is a contrast to the surge amongst builders in confidence. Many builders remain on the optimistic side about the outlook over the long term, as the rate of employment continues to improve.

Stocks were up this week with the S&P 500 posting its first two-session gain in more than three weeks. Investors weighed the new data on housing against the Fed signals from its last meeting.

The average forecast for housing called for a decline to only 487,000 for the year, with the low of 445,000 and a high of 525,000. The Department of Commerce also lowered the readings for three previous months with the pace for June dropped to 455,000 from the originally reported 497,000.

The difference from the outcome of July and the estimate’s from economists was very big and came as a huge surprise making it the biggest difference since April of 2010.

Purchases of new homes in July were higher by 6.8% compared to July of 2012 the report showed. The average price also increased by 8.3% in July compared to one year ago.

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