October marked the worst month for new home sales in the U.S. in more than two years, another blow to homebuilders who had already endured higher mortgage rates and along with bumps in construction and supply costs.
“It adds another nail to the coffin to the housing market expansion,” said Ralph McLaughlin, deputy chief economist with property data firm CoreLogic.
New home sales in October fell 8.9 percent to 544,000 compared to September, marking an almost two-and-a-half-year low, according to U.S. Commerce Department figures released Wednesday. The October numbers also represented a 12 percent decline from October 2017.
And in a separate report from the National Association of Realtors, pending nationwide homes sales — or sales under contract — dipped 2.6 percent last month, to a four-year low.
The news is another indication that the long-predicted end to the post-recession housing boom is finally at hand, market experts said.
McLaughlin said the decline in new home sales is triggered by a rise in mortgage rates, which is making homeownership less affordable and pushing some people out of the market. For a 30-year fixed-rate mortgage in October, the average interest rate was 4.83 percent. While still historically low, it’s far higher than the 3.47 percent it was at two years ago.
Rising rates are compounded by challenges facing homebuilders, who are struggling to make homes affordable from increasing construction, supply and labor costs.
Rising costs have pushed home prices to levels too high for many consumers, said Jack McCabe, owner of McCabe Research & Consulting. The median price of a new house stood at $309,700 in the U.S. in October, according to Commerce Department data.
“Housing prices have increased at a much higher level than household incomes,” said McCabe, who also predicted a sharp drop in luxury home sales.
Danielle Hale, chief economist at Realtor.com, said she still expects prices to rise about 2 percent next year, despite declining home sales, partly from pressures facing suppliers.
But the developers are also making concessions. The Wall Street Journal recently highlighted how homebuilders in the Dallas area are offering steep discounts to attract buyers, cutting prices by up to $150,000 in one nearby suburb to lure potential bidders.
But experts also say the drop in new home sales could be a good thing for the overall market. Last year was one of the best for new housing market, McLaughlin said, so a dip means the industry is rebalancing itself for buyers and sellers.
The recent data also shows that homeownership is rising among consumers under 35, a positive note for the future of the housing industry, McLaughlin said.
The nail in the coffin analogy may signal the end of expansion, he said. “But it doesn’t mean that housing market is going to collapse.”