The housing recovery in the U.S. is running out of steam as buyers balk at record prices and higher mortgage rates that are making properties less affordable.
Sales dropped a surprising 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 saw setbacks, with demand in the West slumping to the lowest level in more than two years.
More expensive properties, borrowing costs that have jumped almost a percentage point from last year and lenders unwilling to go out on a limb are challenging an industry still emerging from its worst slump since the Great Depression. In time, the slowly mending job market will help revive demand at builders such as NVR Inc. (NVR:US)
“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.”
Stocks dropped, checking the Standard & Poor’s 500 Index’s longest winning streak since September. The S&P 500 declined 0.2 percent to 1,875.39 at the close in New York. The S&P Supercomposite Homebuilding Index fell 1.6 percent.
The news was better in Europe as data showed services and manufacturing in the euro area expanded faster than economists forecast in April, indicating the economy continued to strengthen at the start of the second quarter.
The median forecast of 74 economists surveyed by Bloomberg called for the pace of U.S. new-home sales to accelerate to 450,000. Estimates (NHSLTOT) ranged from 428,000 to 476,000. The Commerce Department revised February’s reading to a 449,000 rate from a previously estimated 440,000.
The last time sales were this low or dropped as much in one month was July, when interest rates on U.S. 10-year notes rose more than a percentage point from May after Federal Reserve policy makers indicated they would begin trimming 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.
More higher-priced properties are selling while first-time buyers and lower-income Americans struggle to get into the market. The decrease in sales was concentrated in houses priced less than $300,000, while more expensive dwellings showed gains, today’s report showed.
“The first-time homebuyer is not participating, nor are other buyers of modest means,” said David Crowe, chief economist for the National Association of Homebuilders in Washington. “We’ve lost a segment of our homebuyers because of tight credit.”
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 real estate information service. “Affordability is definitely a concern.”
NVR, 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. (MTH:US) posted a 1 percent decline in orders from the first quarter of 2013, driven by weakness in the West.
“We are projecting that our 2014 home closing gross margin may be relatively flat compared to 2013, due to less pricing power and higher land costs,” Steven Hilton, chairman and chief executive officer of Scottsdale, Arizona-based Meritage, said in a statement today.
Last month’s slump in U.S. home demand was led by a 21.5 percent drop in the Midwest, the biggest decrease for that region since September 2012, today’s figures showed. The West fell 16.7 percent to an 80,000 annualized rate, the weakest pace since January 2012. Only the Northeast reported a gain, which may reflect a bounce back from harsh winter weather in the first two months of the year.
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.
The labor market has shown signs of shaking off its winter slump, which probably will help the housing market right itself in due time. Employers added 192,000 workers to payrolls last month after a revised 197,000 gain in February that was larger than initially estimated, according to Labor Department data.
“You don’t get a job one day and buy a home the next,” said Trulia’s Kolko. “It takes years to save for a down payment, build up an income history to qualify for a mortgage. Buying a home and getting a mortgage is making a bet that you’ll be able to keep paying for that mortgage. And you need to feel secure in your job and your income to make that decision.”
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