U.S. Home Sales Devastated by Rising Mortgage Rates

Sales of newly built homes are falling south of the border, and the reason is simple: homebuyers increasingly can't afford what they want. Higher mortgage rates, combined with the loss of homeowner tax breaks in some of the most expensive markets in the U.S., are taking away buying power.

Sales fell in December, when the new tax law was signed, and then again in January, when mortgage rates moved higher. Sales are now at their lowest level since August of last year.

The government's measure of new home sales is based on signed contracts during the month, reflecting the people who are out shopping and signing deals with builders. It is therefore a strong read on current reactions to home affordability. Mortgage rates moved a full quarter of a percentage point higher during January, from below 4%to about 4.25%. It then took off further from there.

What's worse, higher home prices in many American markets are adding to the difficulty for buyers. The median price of a newly built home rose to $323,000, a 2.5% gain over January 2017. Builders are not only increasing prices, but they are also mostly focused on the move-up market, not the entry level where homes are needed most.

While there is a severe shortage of existing homes for sale, the opposite appears to be the case in the new home market. Supply rose to the highest level in four years, another sign that new construction is increasingly out of financial reach for today's home buyers.