January new home sales underwhelm; do headwinds bear watching?

Disappointing sales pace, downward revisions to past three months highlight new-home sales report

New home sales rose 1.5% in January to a seasonally adjusted annual rate of 661,000 units — a pickup that signals that new home transaction activity remains steady, albeit underwhelming to start the year.

January’s pace, reported jointly by the U.S. Census Bureau and the Department of Housing and Urban Development, was lower than the rate of 664,000 new home sales originally reported in December. That number was further revised downward in January to a rate of 651,000. October and November sales, moreover, were adjusted to the downside as well, making the tail end of last year’s big bounce in new home sales somewhat less impressive.

Economists polled by Reuters had forecast a new home sales rate of 680,000 units, further underscoring the disappointing pace set to start the year. However, the regression, especially coupled with last week’s news of a modest increase in existing home sales, may indicate inklings of a return to equilibrium of sorts for the housing market. With mortgage rates falling under 7% in the new year, greater affordability may be pushing the pendulum back toward existing housing, especially as some sellers pull back on discounts and incentives.

The National Association of Home Builders (NAHB) reported that its latest sentiment poll revealed an increase in residential builders cutting back on discounts: just 25% of builders said the cut home prices in February, down from 31% in January and 36% in November and December. The percentage of builders offering any type of incentive is also down, per the NAHB, from 62% in January and 58% in February.

Other speedbumps loom for the new home market, despite a generally healthy state of affairs. For one thing, interest rates have trended upward again of late, noted Ksenia Potapov, economist at First American Financial Corp.

“The outlook for the new single-family home market is positive, but there are challenges,” she said. “Potential home buyers are sensitive to mortgage rate fluctuations and long-term interest rates have risen again in recent weeks in response to stronger-than-expected economic data.

“While the Federal Reserve is still expected to cut interest rates later this year and with fundamental demand remaining strong, builders are optimistic for the future. However, the significant boost in home sales activity typical for the spring home-buying season may be delayed later into the summer.”


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