September 26, 2018 / 2:11 PM / in 23 days

U.S. new home sales rebound, but trend weakening

WASHINGTON (Reuters) - Sales of new U.S. single-family homes rebounded in August after two straight monthly declines, but the underlying trend still pointed to a weakening housing market against the backdrop of rising mortgage rates and higher home prices.

FILE PHOTO - A home for sale is seen in Santa Monica, California, U.S., March 21, 2017. REUTERS/Lucy Nicholson

The Commerce Department said on Wednesday new home sales rebounded 3.5 percent to a seasonally adjusted annual rate of 629,000 units last month. July’s sales pace was revised down to 608,000 units from the previously reported 627,000 units.

Sales in June were also much weaker than previously reported. Economists polled by Reuters had forecast new home sales, which account for about 11 percent of housing market sales, rising 0.5 percent to a pace of 630,000 units in August.

“Despite the August increase, sales are still on a downward trend after peaking in November of last year,” said Andres Carbacho-Burgos, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

New home sales are drawn from permits and tend to be volatile on a month-to-month basis. They increased 12.7 percent from a year ago.

While economists expect small gains in new homes sales in the coming months, they believe the overall housing market has likely peaked. The housing market is lagging a robust economy, with data last week showing sales of previously owned homes flat in August and building permits hitting a more than one-year low.

RISING MORTGAGE RATES

Economists blame the weakness on rising borrowing costs and house prices, which have outstripped wage growth, making home purchasing unaffordable for some first-time buyers.

The 30-year fixed mortgage rate has increased more than 60 basis points this year to an average of 4.65 percent. House prices rose 5.9 percent in July from a year ago, data showed on Tuesday. In contrast, annual wage growth has been stuck below 3 percent, though it has recently shown signs of picking up.

With the Federal Reserve raising interest rates on Wednesday for the third time this year, mortgage rates are likely to rise further. The U.S. central bank foresees another rate hike in December, three more next year, and one increase in 2020.

The PHLX housing index .HGX was trading lower, bucking a broadly firmer U.S. stock market. The dollar was little changed against a basket of currencies, while U.S. Treasury yields fell.

Residential investment contracted in the first half of the year and is expected to decline further in the third quarter. Some analysts said the housing market weakness could be flagging a slowdown in economic activity.

“Residential investment tends to be an early indicator of a more general slowing in growth,” said Andrew Hollenhorst, an economist at Citigroup in New York. “A rate-related slowdown in housing may be interpreted by Fed officials as an early indication that interest rates are no longer accommodative.”

New home sales in the South, which accounts for the bulk of transactions, fell 1.7 percent in August. Sales jumped 9.1 percent in the West and climbed 2.7 percent in the Midwest. They soared 47.8 percent in the Northeast, which is the smallest segment of the new housing market.

The median new house price rose 1.9 percent to $320,200 in August from a year ago. There were 318,000 new homes on the market in August, the most since February 2009 and up 1.6 percent from July. Supply is, however, just over half of what it was at the peak of the housing market boom in 2006.

A survey last week showed confidence among single-family homebuilders steady in September. While builders welcomed a decline in lumber prices from record highs earlier this year, they said they “still need to manage construction costs to keep homes competitively priced.”

At August’s sales pace it would take 6.1 months to clear the supply of houses on the market, down from 6.2 months in July. Nearly two-thirds of the houses sold last month were either under construction or yet to be built.

“The housing recovery is entering a new stage,” said Michelle Meyer, chief U.S. economist at Bank of America Merrill Lynch in New York. “There is still room for single family construction to expand, but it is likely to remain slow given challenges finding labor and dislocations in the market.”

Reporting by Lucia Mutikani; Editing by Andrea Ricci and Chizu Nomiyama

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