New-home sales drop to three-month low on rates, storms

New-home sales in the US fell at the start of the year to a three-month low, reflecting a combination of affordability challenges as well as harsh winter weather. 

Purchases of new single-family homes decreased 10.5% last month to a 657,000 annualized rate, according to government data issued Wednesday. That trailed the median estimate of economists surveyed by Bloomberg, who expected an annual rate of 680,000.

Sales declined by nearly 15% in the South, the biggest homebuilding region, where several areas experienced record snowfall in January. Sales in the Midwest and Northeast also dropped precipitously, while activity in the West picked up.

The housing market remains hamstrung by elevated prices and borrowing costs, and builders who were initially optimistic about less regulation under President Donald Trump are now coming to terms with the reality of higher costs due to his planned tariffs. However, inventory that's climbing only slowly in the resale market should provide a floor for new-home sales for the time being.

Supply in the new-homes market, meantime, continues to climb, and with sales activity generally tepid, builders are likely to temper construction in the coming months. PulteGroup Inc. and Toll Brothers Inc. each noted on recent earnings calls that they have more spec homes in stock than usual — houses that are built without a committed buyer — so they'll pull back on those projects in coming months.

The number of new homes available for sale increased to 495,000 last month, the highest since December 2007. Even so, prices are still rising — the median sale price increased 3.7% from a year ago to $446,300 in January, the highest for that month on record and reflecting more activity at the higher end.

Mortgage rates declined last week to 6.88% last week, the lowest this year, paralleling a drop in Treasury yields as investors seek safe havens amid a selloff in stocks and oil markets. However, that's still more than double the rate from late 2021, keeping home-buying applications near levels last seen in the mid-1990s, according to Mortgage Bankers Association data.

New-home sales are seen as a more timely measurement than purchases of previously owned homes, which are calculated when contracts close. However, the data are volatile. The government report showed 90% confidence that the change in new-home sales ranged from a 30.4% decline to a 9.4% gain.

The National Association of Realtors will give an update on the existing-home market on Thursday, when it releases its report on pending-home sales for January. Those measure contract signings and therefore tend to be a leading indicator for previously owned home sales, as houses typically go under contract a month or two before they're sold.