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Economic Report: ‘Builders are reluctant to sign sales contracts for houses’: High prices erode new home sales

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The numbers: New home sales fell in April by nearly 6% as affordability constraints begin to weigh on home buyers.

New residential sales occurred at a seasonally-adjusted annual rate of 863,000 in April, the U.S. Census Bureau reported Tuesday. The Census Bureau also revised the March figure for new home sales down to 917,000. Compared to last year, however, new home sales were still shown to be up 48%.

The new home sales report is prone to very significant revisions, as evidenced by the confidence interval cited in the April print. The U.S. Census Bureau noted that the change in new home sales between March and April could be 11.2% larger or smaller than what it is currently reporting.

The median forecast of economists polled by MarketWatch was 959,000.

What happened: Sales rates decreased in every part of the country except for the West, where they rose 3.9%. The largest sales decline occurred in the Northeast, with a nearly 14% drop.

The inventory of new homes for sale at the end of April was down from March. It equated to a 3.8-month supply, down from a 4.6-month supply the month before.

The big picture: Some analysts warned that new home sales may disappoint ahead of the report’s release. Pantheon Macroeconomics chief economist Ian Shepherdson had projected a larger decline than what occurred, citing trends in mortgage application data. The Mortgage Bankers Association’s data to that extent has suggested declining demand among home buyers.

“Over time, though — and usually not much time — new home sales gravitate to the pace implied by the trend in mortgage applications,” Shepherdson wrote in a research note. “So, absent any other reliable near-time indicators of the pace of sales, we have to expect a steep drop in April.”

The decline in mortgage demand could be a reflection of both buyers’ and builders’ concerns about affordability, as mortgage rates have risen this year alongside home prices. The market for new homes is seeing price pressures not just due to the high demand for housing but also because of rising material costs that are driving construction expenses higher.

“Builders are reluctant to sign sales contracts for houses they haven’t broken ground on because of the possibility that costs will continue to rise, nibbling into profits,” said Holden Lewis, housing and mortgage expert at personal-finance website NerdWallet. “So some builders are waiting at least until houses are framed before accepting buyers’ offers. This limits the number of home sales, even as demand remains strong.”

What they’re saying: “The market for new homes has benefitted from a near-record low supply of available resale properties, which is sending prices skyward,” said Sal Guatieri, senior economist at BMO Capital Markets, in a research note.

Market reaction: The Dow Jones Industrial Average 
DJIA,
-0.24%

  and S&P 500 index  
SPX,
-0.21%

 were both up slightly following the report’s release, while homebuilder stocks — including D.R. Horton 
DHI,
+2.31%
,
  Lennar Corp. 
LEN,
+1.80%

 and PulteGroup 
PHM,
+0.91%

  — rose even higher in morning trading.

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