U.S. new home sales tumble in January

Americans stepped back from buying new homes in January, as purchases plunged sharply in western states where prices are typically higher.

The Commerce Department said Wednesday that new-home sales fell 9.2% last month to a seasonally adjusted annual rate of 494,000. Most of the decline stemmed for a 32.1% drop in sales in the West. Sales also slipped in the Midwest, while edging up in the Northeast and South.

“While that’s the lowest level since October of last year, it remains well within the somewhat sideways trend the series has been in since the end of 2014,” says Royce Mendes of CIBC Economics.

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The pace of buying new homes last month slipped below last year’s sales total of 501,000, a possible sign of mounting price pressures despite low mortgage rates and job gains that have pushed the unemployment rate down to 4.9%. But new-home sales also tend to be a volatile government report with revisions and large swings on a monthly basis.

“With inventory still very tight, prices will continue to firm, though the short-term numbers are so volatile that the trend is hard to spot,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Last month’s decrease potentially complicates the outlook for residential real estate. Rising demand for existing homes had sparked hopes that builders will ramp up construction and sales of new homes will further accelerate. The 14.5% increase in new-home sales last year fed into those expectations. But builders have increasingly focused on the more affluent slivers of the market, while the decline in sales listings of existing homes indicate that many Americans may have lost interest in upgrading to a new property.

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A curious price gap appears to have opened up because of these trends. The median new-home sales price fell 4.5% from a year ago to $278,800, likely because of fewer purchases in the West. But the average price — which includes the extremes of the market — has climbed 2.7% from a year ago to $365,700, a difference of nearly $90,000 compared to the median. The increase in the average price has consistently stayed ahead of wage growth, hurting affordability.

New-home sales still lag the historic 52-year average of 655,200. Subprime mortgages helped push up sales as high as 1.28 million in 2005, a peak that ultimately signalled a bubble that burst and pushed the economy into its worst downturn since the depression.

But demand for housing has recovered over the course of the 6 1/2-year recovery from the recession.

Sales of existing homes rose 0.4% last month to a seasonally adjusted annual rate of 5.47 million, the National Association of Realtors said Tuesday. That increase comes on the heels of a strong 2015 when sales reached their highest level in nine years. Supply of homes has failed to increase in response to demand, causing the median sales price to rise 8.2% from a year ago to $213,800.

“Indeed, we still expect the housing sector to be supportive of growth in 2016,” adds Mendes.

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The rising prices have raised questions as to whether construction firms will build more homes to fulfil demand.

Housing starts slipped in January amid colder weather. Ground breakings fell 3.8% last month to a seasonally adjusted annual rate of 1.1 million homes, the Commerce Department said in a separate report. But for all of 2015, housing starts totalled 1.1 million, the most since 2007. The result of all this construction is 238,000 new homes listed for sale, the most since October 2009 and a possible sign that builders anticipate demand rebounding with the start of the traditional spring buying season.

Yet construction firms have also dimmed their optimism slightly this month.

The National Association of Home Builders/Wells Fargo builder sentiment index dropped to 58 in February, a decrease of three points from January. The index had stayed in the low 60s since June. Readings above 50 indicate more builders view sales conditions as positive.