Coverage: New home sales drop to lowest level since 2016

Sales of new U.S. homes slid sharply in October as higher mortgage rates and rising construction costs created significant headwinds for home builders.

Laura Kosisto and Harriet Torry of The Wall Street Journal had the news:

Purchases of newly built single-family homes fell 8.9% to a seasonally adjusted annual rate of 544,000 in October, the Commerce Department said Wednesday. From a year earlier, U.S. sales in October were down 12%.

The 8.9% decline was the steepest since December last year and marked the fifth month of declines this year.

While new-home sales represent a small segment of the overall housing market, they are important because they help drive economic growth through construction work, as well as sales of furniture and appliances. The lackluster new-home sales performance also underscores that the housing slowdown affects more than one segment of the market.

Robert Dietz, chief economist at the National Association of Home Builders, said Wednesday buyers are pulling back sharply as mortgage rates rise. The average interest rate on a 30-year fixed-rate mortgage in October was 4.83%, up from 4.03% in January, according to Freddie Mac.

Andrea Riquier of MarketWatch.com reported that the median sales price also fell:

October’s selling pace for new single-family homes was 8.9% lower than September’s, although that report was revised upward. It badly missed the MarketWatch consensus forecast of a 589,000 pace, and was 12% lower than year-ago levels.

The median sales price in October was $309,700, 3.1% lower than a year earlier. At the current pace of sales, it would take 7.4 months to exhaust available supply. That’s not only above the 6 months that’s long been considered a marker of a balanced market, but also the highest level of supply in seven and a half years.

Big picture: The government’s data on new residential construction is based on small samples, and can be erratic and prone to sizable revisions. Still, it’s clear that the housing market has hit a rough patch. Sales of existing homes rose in October for the first time in six months, the National Association of Realtors said. National annual price growth decelerated for the sixth-straight month in September, according to the S&P/Case-Shiller 20-city index.

Alcynna Lloyd of HousingWire reported that the market is headed for a correction:

TIAA Bank Executive Vice President John Pataky said after another disappointing report, it’s clear we are well into a correction period for the new home market.

“High prices and rising rates are continuing to take their toll on this segment, which is particularly sensitive to changes in these metrics,” Pataky said. “Additionally, declining homebuilder confidence is only exacerbating the troubles for the new home market on the supply side.”

So, what does that mean for sales in 2019? Well, Pataky claims trouble lies ahead.

“Next year, we will likely see a tussle between price moderation creating additional demand and rising rates having the opposite effect,” Pataky said. “No matter which trend wins out, we expect the new home market to continue to face headwinds in 2019.”