After seeing an uptick in sales last year, the nationwide new home market experienced a sharp drop in new home sales activity in January, according to the U.S. Census Bureau’s New Residential Sales report released on Thursday.
Economists say that this could be a momentary drop due to extreme weather conditions, or that the sales figures could be revised next month. Still, demand remains relatively subdued amid a weak labor market and consumer uncertainty. The conflict in the Middle East further complicates the picture, at least in the short term.
“Sales of newly built single-family homes fell 17.6% in January to a seasonally adjusted annual rate of 587,000 from a downwardly revised December reading,” said Jing Fu, senior director of forecasting and analysis at the National Association of Home Builders, in a brief. “The pace of new home sales is down 11.3% from a year earlier. On a three-month moving average basis, sales were 688,000, remaining broadly in line with the 685,000 pace seen a year ago.
The median sales price in January also fell 4.5% month-over-month and 6.8% year-over-year to $400,500, the Census concluded.
Zillow Senior Economist Orphe Divounguy told The Builder’s Daily that he expects a revision upwards from the 17.6% decline, meaning that the actual drop in sales may not be as significant as initially reported.
There are also signs that new home sales bounced back a bit after January. The Zillow housing market report for February indicated improved housing demand last month, indicating that the January drop could be temporary.
Divounguy cited unexpectedly harsh winter conditions in the month of January as a potential factor for the negative sales numbers. First American Deputy Chief Economist Odeta Kushi, in an interview, agreed that weather played a role. However, weather conditions weren’t the only factor at play.
“I think this is partially weather distortion and partially demand softness. I do think it’s a little bit of both,” Kushi said.
If the Census data isn’t revised up, the January figures would be the slowest pace of sales since October 2022, according to Kushi. However, the report paints an incomplete picture, as some builders reported positive sales and demand to start the year.
Hovnanian Enterprises and Toll Brothers, for example, both reported a modest increase in traffic and deposits in January and February compared to a year ago on recent earnings calls.
Clint Mitchell, CEO of Indianapolis-based Estridge Homes, told The Builder’s Daily that his team had the best start to the year that they have ever had, and weather wasn’t much of a factor. January was a strong month, and February sales were even better.
That is partially because Indianapolis is a balanced market that isn’t working through the supply surpluses that Sun Belt markets are working through. Another factor is the buyer that Estridge Homes targets, as the bulk of their inventory is in the $800,000 to $1.2 million range.
The $500,000 to $700,000 segment has been a little weak so far this year, but the higher-income buyer profile — those above $800,000 — has performed quite well for Estridge Homes, Mitchell said. Those buyers are more resilient to market uncertainty and affordability pressures.
“The upper-end buyers are a little more confident and stronger right now, so that’s helping. And then Indianapolis overall seems to be doing better than a lot of the rest of the country, so we’re probably in a favorable market here,” Mitchell explained.
The uncertain demand picture
While mortgage rates have declined significantly compared to last summer and affordability has improved marginally, demand overall remains relatively soft as homebuilders enter the spring selling season.
A weak labor market is a concern, as the U.S. lost 92,000 jobs in February, according to the U.S. Bureau of Labor Statistics. January’s figure of 130,000 new jobs was also revised down to 126,000.
The ongoing war with Iran also adds uncertainty to the mix, introducing supply chain disruptions and potentially eroding consumer confidence amid the early days of the spring selling season. Consumers are paying at the pump, as the closure of the Strait of Hormuz has pushed oil prices to north of $95 per barrel, up from about $65 per barrel before the conflict began.
The average 30-year fixed-rate mortgage has also spiked from about 6.0% before the conflict to 6.22% as of March 19. There’s still a lot of uncertainty over how long the conflict in Iran will last and the long-term impacts it will have, if any. However, there are certainly short-term ramifications.
“It’s really a question of, is that going to be sustained? What is the duration of the conflict and its ultimate impact on inflation? Certainly, if we see that oil prices remain elevated and it starts to feed through into inflation, that will have implications for mortgage rates,” Kushi explained.
Divounguy expects that new home sales could be lower in 2026 than last year, partially because of a slight uptick in existing home sales inventory creating competition with the new home market, paired with a decline in new housing starts. However, builders still have an excess of inventory, equal to about 9.7 months’ worth in January, that they need to work through.
“What goes on with oil prices and how that affects household budget constraints, consumer confidence, and whether it’s time to start making these big purchases again, like buying a house, — that’s the big downside risk to our forecast,” Divounguy said.