The rate at which new homes sold across the country plunged in July, falling 13.4 percent compared with the previous month, the biggest decline in more than three years, according to government data released Friday.
Economists blamed rising mortgage rates for the sudden drop-off but said it was not likely to derail the housing market, which has been experiencing record sales and price increases.
“There’s still plenty of juice left in the housing recovery,” said Robert Denk, senior economist at the National Association of Home Builders.
Sales of single-family homes fell to a seasonally adjusted annual rate of 394,000, the report from the Census Bureau said. June’s sales rate was revised down to 455,000 homes from 497,000.
The July sales rate, however, was nearly 7 percent higher than in the same period last year.
A steady increase in mortgage rates has been weighing on the market, economists said. Rates have been rising since May, driven by expectations that the Federal Reserve will soon begin tapering its bond-buying program, which has kept interest rates low. The rate for a 30-year fixed-rate mortgage reached 4.58 percent last week — a two-year high.
In June, there was a surge in home sales as buyers rushed to lock in a mortgage as rates rose. That contributed to July’s steep drop, Denk said. “This is just a pause after the June rush,” he said.
Housing data over the next few months is likely to continue to be volatile as investors await word on when the Federal Reserve will begin to pull back its stimulus program, Denk said.
New-home sales may have improved compared with a year ago, but there’s a catch: Homes aren’t being built fast enough, experts say. Construction activity has picked up in 2013, but the pace of building needs to be at least 50 percent faster than it is now to meet demand, said Lawrence Yun, chief economist at the National Association of Realtors.
Builders say they’re trying to keep up. Economists expect that it will take two years for construction to get back to normal levels — about 1.2 million to 1.5 million homes per year.
“Construction is going to take awhile to reach an equilibrium with demand,” said William Gilligan, regional president for Maryland and Virginia at Toll Brothers.
On the surface, there doesn’t appear to be anything holding construction back: The housing recovery is on solid ground, builders are increasingly optimistic, and buyers are crowding into the market to make the most of relatively attractive mortgage rates. So why is construction slow to keep up?
Builders are facing three issues borne of the housing crisis: a labor shortage, a dearth of available land and tighter lending standards. On the other side, the rate of “household formation” — young people moving out of their parents’ homes to form the next generation of buyers — remains low.
“A job site can only produce so much,” said Doug Smith, president of Miller & Smith, a McLean-based private builder. “We’re at peak capacity.”
Construction workers moved to other professions in search of jobs during the depths of the housing crisis, Denk said. Now that demand is picking up, builders are having trouble finding skilled tradesmen, from electricians to plumbers, he said.
At the same time, new land is scarce, builders say, especially in the Washington area.
“Land is very competitive,” Gilligan said. “Any well-located property is getting the attention of builders, developers and even investors.”
For smaller builders, which make up the majority of the national market, obtaining a construction loan also remains difficult.
“Banks are still pretty gun-shy about making loans for real estate,” Denk said.
But things are slowly improving at the national level and especially in the Washington area, analysts said.
Loudoun and Prince William counties and other parts of Northern Virginia are some of the hottest markets for new homes, builders said. In Maryland, Montgomery County remains popular. Even Prince George’s County, where construction is moving more slowly than in the rest of the region, has seen an uptick in activity, builders say.
“The pace of recovery in the D.C. market is a year ahead of national trends,” Denk said.