By Lucia Mutikani
WASHINGTON (Reuters) - Sales of new U.S. single-family homes fell more than expected in October as higher mortgage rates squeezed out buyers even as builders cut prices, but the setback is likely temporary amid a persistent shortage of previously owned houses on the market.
The decline in sales reported by the Commerce Department on Monday was in line with a recent deterioration in homebuilder sentiment, which came as the rate on the popular 30-year fixed-mortgage approached 8%, leaving builders anticipating slower buyer traffic. Mortgage rates have since retreated from two-decade highs and are at levels last seen in late September, which could pave the way for a rebound in sales.
"The market for new homes remains very solid by any historical standard and continues to be boosted by extremely low existing home inventory," said Daniel Vielhaber, an economist at Nationwide in Ohio.
New home sales dropped 5.6% to a seasonally adjusted annual rate of 679,000 units last month, the Commerce Department's Census Bureau said. September's sales pace was revised lower to 719,000 units from the previously reported 759,000 units.
Economists polled by Reuters had forecast new home sales, which account for 15.2% of U.S. home sales, would fall to a rate of 723,000 units. The share is the largest in at least a decade.
New home sales are counted at the signing of a contract, making them a leading indicator of the housing market. They, however, can be volatile on a month-to-month basis. Sales increased 17.7% on a year-on-year basis in October.
Monthly sales rose in the Northeast and densely populated South. But they tumbled in the Midwest, the most affordable region, and in the West, where housing is expensive.
The supply of previously owned houses on the market is nearly 50% below its pre-pandemic level, according to the National Association of Realtors, which last week reported that home resales plunged to more than a 13-year low in October.
Most homeowners have mortgage rates under 3%, making many reluctant to sell, boosting demand for new construction.
Stocks on Wall Street were mixed. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.
SALES REBOUND EYED
The rate on the 30-year fixed-rate mortgage jumped to an average of 7.79% in late October, the highest level since November 2000, according to data from mortgage finance agency Freddie Mac. Mortgage rates soared as the Federal Reserve aggressively raised interest rates to fight inflation.
The 30-year fixed rate mortgage has fallen in recent weeks, and averaged a still-high 7.29% last week, tracking the decline in the 10-year Treasury yield amid optimism that the U.S. central bank was likely done hiking interest rates and could start easing monetary policy by mid-2024.
"We would look for a rebound in new home sales, which are a more timely indicator of housing demand, in November or December as mortgage rates fall again," said Veronica Clark, an economist at Citigroup in New York.
The median new house price in October was $409,300, a 17.6% drop from a year ago. That was the largest percentage decline since the government started tracking records in 1964 and probably reflected incentives, including price cuts, being offered by builders to attract buyers.
The National Association of Homebuilders said this month that more than a third of builders reported cutting home prices in November. Price cutting has been the norm this year.
Economists cautioned against reading too much in the price drop, noting that other measures like the Federal Housing Finance Agency's house price index showed strong price growth.
"High prices are also weighing on homebuying activity," said Daniel Silver, an economist at JPMorgan (NYSE:JPM) in New York. "Although the median sale price in the new home sales report fell, we should keep in mind that this is not a very reliable house price gauge because it does not control for changes in the mix of sales."
Houses in the $150,000 to $499,999 price range accounted for a large share of the transactions last month. There were 439,000 new homes on the market at the end of October, slightly up from 433,000 in September.
Most of the inventory was houses under construction. At October's sales pace it would take 7.8 months to clear the supply of houses on the market, up from 7.2 months in September.
The government also reported on Monday that permits for future home construction were higher than previously estimated in October, increasing 1.8% to a rate of 1.498 million units. Building permits were earlier this month reported to have risen 1.1% to a pace of 1.487 million units.
Strong demand for new construction resulted in residential investment rebounding in the third quarter after contracting for nine straight quarters.
With mortgage rates still a constraint, some economists doubted residential investment would continue to expand in the fourth quarter, adding to expectations for a sharp moderation in the broader economy. Growth estimates for the fourth quarter are mostly below a 2% annualized rate. The economy grew at a 4.9% pace in the July-September quarter.
"The risk to our forecast is to the upside if builders continue to successfully attract potential homebuyers with incentives," said Bernard Yaros, lead U.S. economist at Oxford Economics.