New Home Sales Growth Surges to 25-Year High -- Update

U. S. new-home sales in September recorded the largest single-month increase since 1992, a sign the market remains resilient despite two major hurricanes and a continuing inventory shortage.

Purchases of newly built single-family homes -- a narrow slice of all U.S. home sales -- increased 18.9% to a seasonally adjusted annual rate of 667,000 in September from the previous month, the Commerce Department said Wednesday. That put new home sales at the highest level since October 2007.

New home sales remain well below the peak of 1.3 million recorded in 2005.

Both new and existing home sales have been weak through much of the spring and summer, as a shortage of inventory and rising prices have helped keep many buyers out of the market. This report suggests that trend might be reversing.

"It's certainly a surprise. The economy still very much has good life and the outlook is expected for continued growth here late in this economic expansion," said Chris Rupkey, chief financial economist at financial firm MUFG.

The report was greeted with widespread surprise by economists, most of whom expected modest declines in sales in September due to hurricanes in Florida and Texas.

New-home sales data can be volatile and subject to revision. The September increase, which comes with a 19 percentage point margin of error, is still likely to be revised down.

Most surprisingly, the report said that home sales in the south, which includes Florida and Texas, jumped by 25.8%. An aging population moving to warmer climes and relatively affordable home prices have helped make the south a growth market, and that might have outweighed the effect of the hurricanes.

New home sales reflect contracts signed and can be less vulnerable to weather than housing starts, which declined 4.7% in September.

"The south was supposed to be storm ravaged. Instead the south is powering home sales to a new record from the housing bubble collapse," Mr. Rupkey said.

Economists cautioned that rising home prices could begin to put a damper on the market. Strong demand and limited supply have helped push prices up and rising labor and material costs due to hurricane recovery efforts are likely to exacerbate the trend.

Builders reported on their most recent earnings calls that they already are beginning to see shortages of workers and materials such as drywall. They are attempting to control costs by stockpiling materials and leaning on longstanding relationships with contractors.

"If FEMA starts writing checks and we are paying a framer $5 and FEMA funds something and they are offered $10, you are going to be in a chase for that contractor," Jeff Mezger, CEO of KB Home, said on an earnings call late last month.

At the current sales pace, there was a five-month supply of new homes on the market at the end of September, down from six months in August. The median sale price for a new home sold in September was $319,700, up 5.2% from August.

"At some point housing affordability will become a larger issue," said Rob Dietz, chief economist at the National Association of Home Builders.

Sales of existing homes, which represent the bulk of the U.S. market, rose 0.7% in September from a month earlier to a seasonally adjusted annual rate of 5.39 million, the National Association of Realtors said last week, indicating continued weakness in that segment.

While economists were skeptical of this month's new-home sales numbers, they point to a strong growth trend. Year-to-date sales have risen 8.6%. New home sale rose off a weak base in August, when sales fell 3.6%.

"It represents a return to the solid growth trend that's been in place for quite a while," Mr. Dietz said.

Sarah Chaney contributed to this article

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

(END) Dow Jones Newswires

October 25, 2017 12:57 ET (16:57 GMT)