MW The brightest spot in the housing market is fading fast

By Aarthi Swaminathan

New-home sales fell to the lowest level in 3 months, as buyers have grown frustrated with high mortgage rates and high home prices.

New-home sales plunged in January as home buyers pulled back in the face of persistently high home prices and mortgage rates. The drop could portend a tough spring home-buying season for the real-estate industry's hottest subsector.

Sales of newly built homes in the U.S. plunged 10.5% in January, marking the first negative read for the year. The pace of new-home sales fell to the lowest level since October 2024.

The drop was larger than economists surveyed by Dow Jones Newswires and the Wall Street Journal expected. Economists also attributed the large fall in new-home sales to severe winter weather that deterred many buyers from viewing properties.

But the plunge in new-home sales also comes on the heels of a bleak read of the future of new-home sales from builders earlier this month, and the data altogether signals a rocky road ahead for the sector.

Spooked by tariffs and potential immigration reform, builders are worried about construction costs, making them more pessimistic about their ability to sell newly constructed homes in the next six months.

The drop in confidence among builders is a major reset of expectations. In the current cycle of housing unaffordability - where there are too few homes for sale to meet home-buying demand - new-home construction and sales have until now been considered the brightest spot in the U.S. housing market.

As real-estate agents saw sales of existing homes fall to the lowest level in 30 years in 2024 due to a persistent inventory shortage, builders scaled up and offered buyers in certain markets more homes to purchase.

"The new home sector has served as a relief valve for the housing market over the last few years," Hannah Jones, a senior economic research analyst at Realtor.com, told MarketWatch. (Realtor.com is operated by News Corp subsidiary Move Inc.; MarketWatch publisher Dow Jones is also a subsidiary of News Corp.)

But as more existing homes hit the market, and as buyer demand still remains weak, builders' edge in the housing market could be coming to an end. In January, total resale housing inventory was up 17% from a year ago, according to the National Association of Realtors.

Builders are now sitting on high levels of inventory. The number of finished homes on the market in January was at the highest level since August 2009, in the aftermath of the Great Recession.

Buyers have pulled back from new homes partly due to high prices. Builders have largely held off on cutting prices on their homes, and the median sales price of a new home in January was $446,300. From a buyer's perspective, buying a resale home is relatively cheaper, as the median sale price was about $396,900 in January, according to the NAR.

New-home prices could come down due to high levels of inventory, Oliver Allen, a senior U.S. economist with Pantheon Macroeconomics, wrote in a note. "The glut of unsold new homes had been pushing down prices," he wrote, adding that they "expect further slight declines in new-home prices over the next few quarters."

But elevated mortgage rates remain a pain point for many buyers. With the 30-year mortgage rate at 6.9%, a home buyer who budgets $3,000 a month for their housing costs can afford a $446,000 home, according to an analysis by Redfin $(RDFN)$, a real-estate brokerage. If rates go up to 7.1%, that buyer's budget shrinks to $439,900, the brokerage noted.

To be sure, data on new-home sales can be volatile, so take it with a grain of salt, Daniel Vielhaber, an economist with Nationwide, said in a statement.

"Although the decline in total sales was substantial, there is too little information in this one month of data to indicate that the market for new homes has shifted to a lower gear," he said.

And ultimately, the housing market should still benefit from new homes on the market.

"New construction will continue to be vitally important to regaining balance in the housing market," Realtor.com's Jones said, "but may be less dominant than in years past as existing inventory continues to pick up."

-Aarthi Swaminathan

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 26, 2025 12:58 ET (17:58 GMT)

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