Sales of new single family homes plunged 7.8 percent from December to January, dashing hopes that a surge of homebuilding might alleviate a growing housing shortage.
The U.S. Census Bureau report shows the number of new homes sold was also down one percent from January 2017. The results mean it is even harder to enter the housing market since there are fewer homes to choose from. Inventories of existing homes have consistently declined over the last two years as well.
LendingTree Chief Economist Tendayi Kapfidze believes rising mortgage rates may be starting to affect sales. With the median price of a new home at $323,000, higher rates would contribute to higher monthly payments. Not surprisingly, it was the more expensive homes that remained on the market last month.
"Homes above $500,000 fell back to 16 percent of sales in January," Kapfidze said. "In December, sales above $500,000 were 22 percent of sales, the highest proportion since the sales price breakout began in 2002."
Shifting to less-expensive homes
"This is disappointing given the importance of new construction in powering overall home sales," Joseph Kirchner, Ph.D., senior economist at realtor.com, told ConsumerAffairs.
"Today's report provides further evidence that builders are slowly shifting toward more moderately priced homes. The drop in sales may be due to saturation in the upper price range of the market, which should compel builders to follow the market and build more moderately priced homes."
That would be a positive development since the housing shortage is worst in the entry-level segment, with fewer homes that first time buyers can afford. If there is a shift in the making, the new tax law may be responsible.
The biggest drop in sales came in the Northeast, where home prices and taxes tend to be very high. Kapfidze says that's evidence of the new tax law's ill effects on the housing market, reducing the value of homeowner tax deductions in high tax states.
But if homebuilders conclude they are going to sell fewer expensive homes, they might begin putting up more less-expensive homes, which they've avoided in recent years because profit margins are lower.
Kapfidze says the tax law just might make these cheaper houses more profitable for builders. He says the reduction in corporate taxes and other real estate developer friendly tax breaks should increase builder profit margins by 10 to 20 percent.