U.S. home sales unexpectedly fell in January, leading to the biggest year-on-year decline in more than three years, as a chronic shortage of houses lifted prices and kept first-time buyers out of the market.
The supply squeeze and rising mortgage interest rates are stoking fears of a lackluster spring selling season. The second straight monthly drop in home sales reported by National Association of Realtors on Wednesday added to weak retail sales and industrial production in January in suggesting slower economic growth in the first quarter.
“There may be some headwinds ahead for home resales with rising mortgage costs affecting how much the buyer can afford and this could put a damper on existing home sales and take some of the wind out of the economy’s sails,” said Chris Rupkey, chief economist at MUFG in New York.
Existing home sales dropped 3.2 percent to a seasonally adjusted annual rate of 5.38 million units last month, with purchases declining in all four regions. Economists polled by Reuters had forecast home sales rising 0.9 percent to a rate of 5.60 million units in January.
Existing home sales, which account for about 90 percent of U.S. home sales, declined 4.8 percent on a year-on-year basis in January. That was the biggest year-on-year drop since August 2014. The weakness in home sales is largely a function of supply constraints rather than a lack of demand, which is being driven by a robust labor market.
The shortage of properties is concentrated at the lower end of the market. While the number of previously-owned homes on the market rose 4.1 percent to 1.52 million units in January, housing inventory was down 9.5 percent from a year ago.
That was also the lowest inventory for January on record. Supply has declined for 32 straight months on a year-on-year basis. At January’s sales pace, it would take 3.4 months to exhaust the current inventory, up from 3.2 months in December.
A six-to-seven-month supply is viewed as a healthy balance between supply and demand. The median house price increased 5.8 percent from a year ago to $240,500 in January, marking the 71st consecutive month of year-on-year price gains.
The PHLX housing index .HGX was trading higher, tracking a broadly firmer U.S. stock market. The dollar .DXY strengthened against a basket of currencies as yields on shorter-dated U.S. Treasuries rose.
ECONOMIC GROWTH RISK
“It looks likely that real residential investment will decline in the first quarter and we see downside risk to our forecast for 2.5 percent real GDP growth during the quarter,” said Daniel Silver, an economist at JPMorgan in New York.
The economy grew at a 2.6 percent annualized rate in the fourth quarter. Making housing expensive for some first-time home buyers, the 30-year fixed mortgage rate rose to an average of 4.38 percent last week, the highest level since April 2014, according to data from mortgage finance agency Freddie Mac. It was up from 4.32 percent in the prior week.
Mortgage rates are increasing in tandem with U.S. government bond yields on worries about rising inflation. In contrast, wage growth remains stuck below 3 percent on an annual basis despite the unemployment rate being at a 17-year low of 4.1 percent.
“We have hoped that the rise in rates motivates home buyers to act soon but the move in rates may have been so drastic that they are now waiting to see if rates start to make a move down,” said Brian Surgener, a senior vice president at BBMC Mortgage in Lombard, Illinois.
“Americans are not saving more and as home prices rise more of a down payment will be needed. So with more savings needed and payments increasing many home shoppers may be back on the fence until we see one of these trends turn around.”
A separate report from the Mortgage Bankers Association on Wednesday showed applications for loans to buy a home decreased 6 percent last week from a week earlier. There are also worries that caps on the deduction for mortgage interest following a recent overhaul of the tax code could hurt demand for houses.
Economists expect supply to remain tight this year, which together with pricey home loans could result in modest home sales growth in 2018.
But housing supply could improve in the coming months as government data last week showed the number of homes under construction surged to near a 10-1/2-year high in January. Single-family home completions were the highest since June 2008.
In January, houses typically stayed on the market for 42 days, up from 40 days in December and down from 50 days a year ago. Forty-three percent of homes sold in January were on the market for less than a month.