New home sales fell sharply, almost 9%, to a 544,000-unit pace in October to the lowest level in more than two years. That follows a sharp decline in home builder confidence. Foot traffic actually contracted, which is important when looking at overall housing market demand. New home sales are booked when the offer is accepted on a home, not when the contract is actually closed as it is in the existing market. In this way, new home sales provide us with a leading indicator for sales housing market demand.

The drop in new home sales was broad-based and across regions. Builders and realtors have been reporting weakness in trying to sell the most expensive homes. Sales of homes priced over $1 million have weakened dramatically over the last year. Builders and buyers continue to move farther downscale. Sales in the $400,000-$499,000 category were hardest hit while the $200,000-$299,000 category held up somewhat better. The median price of a new home dropped to $309,700, off more than 3% from a year ago.

Existing home sales held up better, rising 1.4% to a 5.22 million-unit rate in October. Existing sales remained more than 5% lower from a year ago. Total new and existing sales have fallen almost 6% from a year ago. That marks the largest year-on-year decline since the government’s first-time home buyer credit came to an end in early 2014.

The median price for an existing home sold in October was $255,400, up 3.8% from year-on-year. Housing appreciation in the existing home market has slowed considerably in recent months, with the most marked slowdowns occurring in some of the hottest markets. A loss of absentee foreign buyers is one reason for the slowdown. Chinese buyers have cut back dramatically during the last year. Prices are still out of reach, however, for too many first-time buyers.

Note: The recent fires in Northern California have destroyed at least 13,000 homes and left more than 100,000 people homeless according to FEMA estimates. Rebuilding will be slow. Look for mobile homes to be used to provide temporary homes for those displaced. As FEMA’s supply of usable mobile homes is running extremely low, however, Congress will have to allocate funds for even minimal rebuilding efforts.

Separately, the first round of revisions to real GDP for the third quarter was released this morning. The overall economy grew at an estimated 3.5% annual pace, the same as initially reported. The composition of gains, however, did change modestly. Consumer spending was strong but a bit weaker than initially reported, business investment eked out a modest gain and, the housing market remained a drag on growth for the third quarter in a row. We expect that trend to continue given today’s data on the start of the fourth quarter.

Bottom Line

The housing market continues to struggle despite a modest uptick in existing home sales; the market for new home sales remains suppressed. There are reports that the weakness in sales has increased demand for apartment rentals. The problem is costs, which continue to rise for builders and make it difficult for them to move downscale in the apartment market as well.