Sales of new homes tumbled 16.6% in April, as rising prices and higher mortgage rates crimped the enthusiasm of buyers, the U.S. Census Bureau and Department of Housing and Urban Development reported on Tuesday.
The drop in sales volume to an annual rate of 591,000 followed March’s revised decline to 709,000. Sales in April were down 26.9% from a year ago.
It was the fourth consecutive month of decline.
The sharp dip comes as consumers are beginning to show signs of the impact of inflation. Last week, retailing giants Walmart and Target reported earnings that came up short of Wall Street estimates.
“New home sales are feeling the impact of high construction costs and surging mortgage rates, which are keeping many buyers away this spring,” George Ratiu, senior economist & manager of economic research at Realtor.com.
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“While new construction gained favor with many would-be buyers over the past two years due to the extreme shortage of existing homes for sale, the rising cost of a new home is now pricing many people out of the market,” Ratiu added. “The median price of a new home jumped 21% higher compared with last year, pushing the monthly mortgage payment about $660 higher, a 52% increase at today’s average mortgage rate.”
Housing has been one of the stalwarts of the economy during the coronavirus pandemic, but now it is facing the same issues that are bedeviling the rest of the economy: rising prices and declining affordability. The rate on a 30-year fixed rate mortgage is now about 5.47; a year ago it was around 3%.
“Last week, the National Association of Homebuilders Sentiment Index slid to its lowest since June 2020, with current and future sales, as well as buyer foot traffic all declining,” Wilmington Trust’s Chief Economist Luke Tilley and Chief Investment Officer Tony Roth said on Monday.
“We expect reduced affordability to weigh on demand for housing, taking some pressure off housing related measures of inflation (which account for over 30% of the consumer price index), though the effect will likely come through with a lag,” they added.
The Federal Reserve has embarked on an aggressive tightening of monetary policy in a bid to curb inflation. On Wednesday, the central bank will release minutes of its meeting earlier this month when it raised interest rates by 50 basis points. Observers will be looking for any indication of the Fed’s future plan for interest rates. Chairman Jerome Powell and Vice Chair Lael Brainard are also scheduled to give speeches on Wednesday and Thursday.
Wells Fargo economists on Tuesday released an analysis that shows the unusual nature of the current economic environment, where households are actually in better shape than would usually be the case if a recession were on the horizon, as some predict.
“This atypical situation in which consumer balance sheets emerged from recession in better shape than they were prior to the downturn has led to unusual outcomes,” the bank reported. “Consumers have been taking a break from all their worries and that sure has helped sustain spending in the face of higher inflation. Sustaining spending becomes more challenging the longer inflation persists and as monetary policy becomes more restrictive.”
Still, the economists sounded a cheery note.
“Inflation is presently transitioning from “high and rising” to “high and falling.” Access to credit will remain available albeit at a rising cost,” they wrote. “That, combined with a massive pile of savings from which to draw from, will see households through until real income growth returns as a sustainable source to fund future spending.”