New home sales for April came in well below expectations, falling by 11.4%, where a fall of 1.8% was expected. March’s change was unrevised at 5.8% growth. The annual rate of change dropped to 0.5% from 20.5% in March. The level of sales plunged to 569,000 from 642,000 in March.
Regionally, the pattern of new home sales was weak across the board: 26.3% lower in the West, 13.1% in the Midwest, 7.5% in the Northeast, and down 4.0% in the South. The number of months’ supply of new homes rose to 5.7 months, the highest level since September.
This month’s decline was much larger than expected and will help add to nascent fears of a slowing in the housing market: housing starts, for example, were -6.6% and -2.6% in March and April, respectively. However, we continue to believe that this relates more to supply issues than demand. Mortgage applications, for example, have been particularly strong, as has consumer confidence and employment growth, while income growth is still accelerating at a moderate pace. Furthermore, there has been a large divergence between the supply of existing homes and new homes. This is the result of a shortage of construction workers, a lack of available lots upon which to build, and an increased regulatory burden, all of which have combined to increase the cost of a new homebuild relative to purchasing an existing home. However, with the supply of existing homes extremely low, demand for new homes will start to increase as the supply side responds to the demand. In short, new housing starts and sales should improve in the coming months.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.