By Lucia Mutikani
WASHINGTON (Reuters) – Sales of new U.S. single-family homes fell more than expected in January as persistently high mortgage rates sidelined potential buyers, the latest indication that housing market and overall economic activity slowed early in the first quarter.
The steep decline in new home sales, reported by the Commerce Department on Wednesday, also likely reflected the impact of snowstorms and extremely cold weather in much of the country last month. The report followed data this month showing a decline in retail sales in January and a job growth cooldown.
The outlook for the busy spring home selling season is cloudy, with mortgage rates not expected to budge much from current levels amid policy uncertainty. The median house price increased to more than a two-year high in January, even as supply rose to levels last seen at the end of 2007.
“Today’s drop in new home sales is just one more piece of the puzzle and it is becoming clearer, the economic activity in the first quarter is off to a slow-as-molasses start,” said Christopher Rupkey, chief economist at FWDBONDS.
New home sales plunged 10.5% to a seasonally adjusted annual rate of 657,000 units last month, the Commerce Department’s Census Bureau said. The sales pace for December was revised higher to a rate of 734,000 units from the previously reported 698,000 units. Economists polled by Reuters had forecast new home sales, which make up about 15% of U.S. home sales, would slide to a rate of 680,000 units.
Sales tumbled 20.0% in the Northeast and plummeted 16.7% in the Midwest, likely chilled by frigid temperatures. They dropped 14.8% in the densely populated South, which also experienced winter storms, but increased 7.7% in the West despite wildfires in California.
New home sales are counted at the signing of a contract. They slipped 1.1% on a year-on-year basis in January. The median new house price increased 3.7% to $446,300 in January from a year earlier. That was the highest level since October 2022.
Stocks on Wall Street were trading higher. The dollar was little changed against a basket of currencies. Shorter-dated U.S. Treasury yields rose.
REDUCED AFFORDABILITY
Higher mortgage rates have combined with elevated house prices to significantly erode affordability. The average rate on the popular 30-year fixed-rate mortgage bounced around 7% in December, data from mortgage finance agency Freddie Mac showed. It has declined to about 6.85%.
Mortgage rates have remained elevated despite 100 basis points of Federal Reserve interest rate cuts since September. The U.S. central bank paused the rate cuts in January while it assesses the impact of the Trump administration’s policies, such as tariffs, tax cuts and mass deportations of immigrants, which are viewed as inflationary by economists.
Mortgage rates track the yield on the 10-year Treasury note. Though the 10-year yield has dropped in recent days amid softer economic data, concerns about inflation will likely limit the scope of the decline. Consumers’ inflation expectations have surged on fears that tariffs will increase goods prices.
Tariffs have also soured business and consumer confidence.
Data last week showed existing home sales tumbled in January and single-family homebuilding dove. Residential spending, which includes homebuilding and home sales, rebounded in the fourth quarter after two straight quarterly declines.
Growth estimates for the first quarter are mostly below a 2% annualized rate. The economy grew at a 2.3% pace in the October-December quarter.
“With mortgage rates still hovering close to 7% and home prices rising at a substantial pace, the near-term prospects for home sales are less than stellar,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.
The inventory of new homes last month increased 1.4% to 495,000 units, the highest level since December 2007.
Some 274,000 units were under construction, unchanged from December, while 115,000 units were completed, the highest level since August 2009. The remaining 106,000 homes were yet to be built, an all-time high.
Higher inventory could make builders reluctant to break ground on new housing projects.
Updated data on Wednesday showed permits for future homebuilding fell 0.6% to a rate of 1.473 million units in January, instead of edging up 0.1% as reported last week.
At January’s sales pace it would take 9.0 months to clear the supply of new houses on the market, up from 8.0 months in December.
“The overhang of new homes for sale seems partly to reflect a rush in new projects in 2023 and 2024, as homebuilders bet on a significant upturn in demand that has failed to materialize,” said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. “This points to a significant pullback in new residential construction projects over the next few quarters.”
(Reporting by Lucia Mutikani; Editing by Paul Simao)
