Entry Level Buyers Drive Solid New Home Sales

Sales of newly built homes rose in October for the second consecutive month, driven by demand for entry level homes.

Purchases of newly built single-family homes, a small portion of all U.S. home sales, increased 6.2% to a seasonally adjusted annual rate of 685,000 in October from the previous month, the Commerce Department said Monday.

The advance supports a longer-term positive trend in the market. In all, new home sales were up 8.9% in the first 10 months of the year from the same period last year and have jumped 18.7% in the past 12 months.

Entry-level buyers are driving much of the activity. Sales of homes in the $200,000 to $300,000 range increased more than 35% in October from a year earlier. Demand for starter homes is expected to fuel continued sales growth if builders can ramp up construction quickly enough. Builders face a number of challenges, such as high land costs, labor shortages and rising material prices.

"The market is starving for affordable new homes, and builders cannot and will not ignore this hungry market," said Svenja Gudell, chief economist at home listings website Zillow.

The number of homes that have been sold but haven't yet started construction jumped by 30% in October from a year earlier. That suggests housing starts should rise strongly in the coming months.

"The fact that you've got gains in homes sold but not started construction is confirmation that there is simply not enough inventory," said Robert Dietz, chief economist at the National Association of Home Builders. "The markets that are going to grow are ones where builders can add that entry level product."

That is good news for the U.S. economy overall because it indicates consumers have confidence in their economic prospects and will be making ancillary purchases, such as new flooring, furniture and landscaping, in the months ahead.

"New home sales are a leading indicator, and the jump in October sales are leading the economy higher as we finish out the year," said Chris Rupkey, chief financial economist at financial-services firm MUFG.

But inventory shortages remain a constraint. At the current sales pace, there was a 4.9-month supply of new homes on the market at the end of October, the lowest level this year and down from nearly six months in the summer.

The median sale price for a new home sold in October was $312,800, up from $302,800 in October 2016.

October's robust growth comes after new-home sales jumped 14.2% in September, signaling this segment of the housing market remains strong despite recent hurricanes and supply shortages that are constraining purchases of existing homes.

Still, U.S. new-home sales remain about half what they were during the last boom. In 2005 more than 1.2 million new U.S. homes were sold.

Sales of existing homes, which makes up the bulk of the U.S. housing market, dipped 0.9% in October from the same month a year earlier, the second consecutive decline on an annual basis, the National Association of Realtors said last week.

Sharon Nunn contributed to this article.

Write to Laura Kusisto at laura.kusisto@wsj.com

(END) Dow Jones Newswires

November 27, 2017 12:59 ET (17:59 GMT)