New home sales fell by nearly 17% in April as buying became even less affordable

(CNN) The double punch of high home prices and rising mortgage rates took a toll on sales of newly constructed homes in April.

New home sales fell by 16.6% in April from March and were down 26.9% from a year ago, according to a joint report from the US Department of Housing and Urban Development and the US Census Bureau. It was the fourth consecutive month of declines, with sales falling to the lowest level since the early days of the pandemic in April 2020.

Only 591,000 homes were sold last month, down from a revised 709,000 in March.

Buyers saw their budgets stretched thin by long construction times, mounting costs and rising mortgage rates. The average interest rate for a 30-year, fixed-rate mortgage surpassed 5% in mid-April, and is now up 2 percentage points since January.

"High construction costs and surging mortgage rates are keeping many buyers away this spring," said George Ratiu, senior economist and manager of economic research at Realtor.com.

New construction has been appealing to many would-be buyers who have encountered a lack of existing homes to choose from over the past two years, but the rising cost of a new home is now pricing people out of the market, he said.

The median price of a new construction home was $450,600 in April, 20% higher from a year ago when the median price was $376,600. Given the increases in both prices and rates, the monthly payment of principal and interest for a median priced home is 57% more expensive today than a year ago, costing a homeowner $720 more a month, according to numbers from Freddie Mac.

The movement in the new home market is mirroring broader real estate trends in which rising inflation is taking a bigger bite out of Americans' paychecks and surging borrowing costs are reducing home buyers' purchasing power.

That has pushed a lot of first-time buyers to the sidelines.

"With affordability on a steep decline, new homes have become a luxury for trade-up buyers with significant equity, or investors with cash looking to turn them into single-family rental developments," said Ratiu.

Newly built homes in lower price points remain a small part of the market. Sales of entry-level new homes -- those priced below $300,000 -- accounted for less than 20% of April's total new home sales.

While labor costs remain elevated, prices for materials are showing some signs of moderation. That could bring some relief to high construction costs, said Ratiu, who noted that the price of lumber has been declining.

Home builder sentiment, which measures builder perceptions of current sales conditions, the traffic of prospective buyers and sales expectations for the next six months for single-family homes, fell in May, according to the National Association of Home Builders / Wells Fargo Housing Market Index, released last week. It was the fifth straight month that builder sentiment declined and was the lowest reading since June 2020.

Robert Dietz, NAHB's chief economist, said that the cost of building materials is up 19% from a year ago and that less than 50% of new and existing home sales are affordable for a typical family.

"Entry-level and first-time home buyers are especially bearing the brunt of this rapid rise in mortgage rates," Dietz said.

But some housing experts say that higher interest rates are having their intended effect of cooling off a housing market that has been on a tear.

"New home sales will likely recover near-term as some homebuyers draw up new budgets and adjust to higher interest rates," said Bill Adams, chief economist for Comerica Bank. "Home price increases are set to cool considerably in the next few months as this transition unfolds."

While some would-be buyers will simply be priced out, demand is still strong, making a big drop in house prices is unlikely, he said.

Demand remains strong because of the rise of remote work and other lifestyle changes, said Adams. "Robust end-demand, a very strong job market, and the absence of the kinds of high-risk mortgage lending that existed in the early 2000s should make the market more resilient to higher mortgage rates."