Bloomberg News

Drop in U.S. New-Home Sales Caps the Best Year Since 2008

January 27, 2014

New U.S. Home Sales Drop

The housing rebound has cooled as bad weather slowed the market and as buyers adjust to higher borrowing costs and rising property values, which have hurt affordability. Photographer: Matthew Staver/Bloomberg

Sales of new U.S. homes dropped more than forecast in December as cold weather helped put a chill on an industry at the end of its best year since 2008.

Purchases decreased 7 percent to a 414,000 annualized pace, lower than any estimate of economists surveyed by Bloomberg, Commerce Department figures showed today in Washington. For all of 2013, demand jumped 16.4 percent to 428,000.

The coldest December in four years discouraged sales at the same time affordability weakened as prices and interest rates climbed. While the weather has worsened this month, builders such as KB Home (KBH:US) have been optimistic about the outlook for the residential market, which will need to expand to meet the needs of a growing population.

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“I wouldn’t panic, but it’s obviously not a good report,” said Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York, the best forecaster of new-home sales over the past two years, according to data compiled by Bloomberg. “I don’t feel like this is the beginning of the end of the housing recovery by any stretch.”

The slackening shows the challenges faced by Federal Reserve officials as they trim stimulus aimed at boosting the expansion. Policy makers, who begin a two-day meeting tomorrow, have said they’ll take measured steps in reducing monthly bond purchases.

Mortgage Rates

Borrowing costs for prospective buyers have climbed since U.S. central bankers last year signaled they would pare purchases of mortgage-backed securities and other bonds, a process that began this month. The Fed probably will stick to its plan to gradually reduce asset purchases, tapering by $10 billion over the next six meetings before announcing an end to the program no later than December, according to a Bloomberg survey of economists.

“We know they are concerned about interest-rate sensitive indicators of the economy,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Now that they have started, the problem is how do they explain tapering the original $85 billion to $75 or $65 billion is not really tightening?”

Stocks fell, extending losses following the worst week for benchmark indexes since 2012. The Standard & Poor’s 500 Index declined 0.5 percent to 1,781.56 at the close in New York.

The median forecast of 75 economists surveyed by Bloomberg called for 455,000 new-home sales last month. Estimates ranged from 420,000 to 475,000. October and November purchases were weaker than initially reported.

Bad Weather

Inclement weather probably dealt a setback to some builders. The extent of snow cover in the contiguous U.S. was the eighth-largest on record for the month, according to the National Oceanic and Atmospheric Administration. It also marked the coldest December since 2009, the agency said.

Such conditions weighed on construction as well. Housing starts fell 9.8 percent last month to an annualized rate of 999,000 following November’s 1.11 million pace, which was the highest since November 2007, the Commerce Department said earlier this month. Work on single-family houses dropped 7 percent to a 667,000 rate from 717,000 the prior month.

Today’s report showed the median sales price of a new home rose 4.6 percent from December 2012 to $270,200. Higher prices, along with borrowing costs, have made purchases more difficult for some buyers. The average rate for a 30-year fixed mortgage was 4.39 percent last week, up from 3.35 percent in early May, according to data from Freddie Mac in McLean, Virginia.

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 properties.

Existing Homes

Purchases of previously owned homes climbed in December for the first time in five months, rising 1 percent to a 4.87 million annual pace, the National Association of Realtors reported Jan. 23. Combined sales of existing and new dwellings increased to 5.52 million in 2013, the strongest year for residential real estate since 2006.

Caterpillar Inc., the largest maker of mining and construction equipment, today forecast earnings and revenue for 2014 that topped analysts’ estimates (NHSLTOT) as the recovery in U.S. homebuilding spurs sales of bulldozers and excavators.

The Peoria, Illinois-based company forecast world economic growth at about 3 percent this year, up from about 2 percent in 2013. It predicted sales in its power systems and construction industries units will rise 5 percent.

New-housing demand has rebounded from a record-low 306,000 homes sold in 2011. That compares with a record peak of 1.28 million in 2005 at the height of the housing boom.

By Region

December purchases dropped in three of four regions, led by a 36.4 percent plunge in the Northeast, the smallest market. The two largest areas, the South and West, also declined, while the Midwest jumped 17.6 percent.

The supply of homes at the current sales rate rose to 5 months, the most since September, from 4.7 months in November. There were 171,000 new houses on the market at the end of December, the fewest since July.

Builders see plenty of room for growth this year, said Jeffrey Mezger, chief executive of KB Home in Los Angeles.

“The fundamental drivers of a housing recovery remain in place, although conditions are not as favorable as they were six months ago,” Mezger said on a Dec. 19 earnings call. While borrowing costs and home prices have increased, “affordability is at attractive levels, demographics remain strong and there’s pent-up demand.”

While higher borrowing costs and prices are keeping some people out of the market, that pause should be short-lived, Mezger said.

“In the meantime, we feel that less upward pressure on home prices is healthy for a measured, sustainable housing recovery,” he said.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net


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