New-home sales in the U.S. took a surprising plunge in March to the lowest level in eight months as buyers balked at record prices and higher mortgage rates that made properties less affordable.
Sales dropped 14.5 percent to a 384,000 annualized pace, lower than any forecast of economists surveyed by Bloomberg and the weakest since July, Commerce Department data showed today in Washington. Three of the four regions of the country saw setbacks, with demand in the West slumping to the lowest level in more than two years.
Rising property values, borrowing costs that have jumped almost a percentage point from last year and strict lending rules for those willing to buy represent challenges for the industry that is still trying to emerge from the worst slump since the Great Depression. Shortages of buildable lots and skilled labor also have hindered construction as the market heads into its busiest time of year.
"It's the reduction in affordability, the lack of inventory, also weak growth in median household income -- all these are contributing to the sluggish recovery in housing," said Ryan Sweet, a senior economist at Moody's Analytics Inc. in West Chester, Pennsylvania, who forecast sales would drop in March. "It's going to raise concerns about the strength of the housing recovery, but it's too early to be too worried."
The median forecast of 74 economists surveyed by Bloomberg News called for the pace to accelerate to 450,000. Estimates ranged from 428,000 to 476,000. The Commerce Department revised the February reading up to a 449,000 pace from a previously estimated 440,000.
Stock extended earlier losses after the report. The Standard & Poor's 500 index dropped 0.1 percent to 1,877.41 at 11:50 a.m. in New York. The S&P Supercomposite Homebuilding Index declined 1.7 percent.
The last time sales were this low or dropped as much in one month was in July when interest rates on U.S. 10-year notes rose more than a percentage point from May after Federal Reserve policymakers indicated they would begin to trim asset purchases.
The median sales price of a new house climbed 12.6 percent from March 2013 to $290,000, the highest in data going back to 1963, today's Commerce Department report showed.
The average rate on a 30-year, fixed mortgage was 4.27 percent in the week ended April 17. A year ago, the rate averaged 3.41 percent, according to Freddie Mac in McLean, Virginia.
"Prices are rising, mortgage rates are higher, and that makes it considerably more expensive to buy than it was a year ago," said Jed Kolko, chief economist for Trulia Inc., a San Francisco-based online real estate information service. "Affordability is definitely a concern.
NVR Inc., a homebuilder based in Reston, Virginia, this week reported a 5 percent drop in new orders in the January through March period from a year earlier, which contributed to a 32 percent plunge in net income. Meritage Homes Corp. posted a 1 percent decline in the number of orders from the first quarter of 2013, driven by weakness in the West.
"The high-pitched pace of sales in our western region has slowed in recent quarters after experiencing very robust demand and significant increases in home prices since 2012," Steven Hilton, chairman and chief executive officer of Scottsdale, Arizona-based Meritage, said in a statement today.
The slump in demand last month was led by a 21.5 percent drop in the Midwest, the biggest decrease for that region since September 2012. The West fell 16.7 percent to an 80,000 annualized rate, the weakest pace since January 2012.
The supply of homes climbed to 6 months, the most since October 2011, from 5 months in February. There were 193,000 new houses on the market at the end of March, the most since November 2010.
New-home sales, which account for about 7 percent of the residential market, are tabulated when contracts are signed, making them a timelier barometer than transactions on existing homes.
The pace of residential construction was held back last month even in warmer parts of the country that weren't hit with snow and frigid temperatures. Housing starts climbed 2.8 percent to a 946,000 annualized rate following February's 920,000 pace, the Commerce Department reported last week. Permits for future projects declined.
Sales of existing homes fell in March for a third consecutive month as rising prices and a lack of inventory discouraged would-be buyers. Closings on previously owned properties, which usually occur a month or two after a contract is signed, fell 0.2 percent to a 4.59 million annual rate, the lowest level since July 2012, the National Association of Realtors reported yesterday. Purchases were down 8.5 percent compared with the same month last year.