By Laura Kusisto and Sarah Chaney 

U.S. new-home sales fell sharply in July, providing fresh evidence that a shortage of housing inventory is depleting activity across all segments of the market.

Purchases of newly built single-family homes, a narrow slice of all U.S. home sales, decreased 9.4% to a seasonally adjusted annual rate of 571,000 in July, the Commerce Department said Wednesday.

"It has been surprising the extent to which new home sales have not picked up more," said Aaron Terrazas, a senior economist at Zillow. "It does seem to reflect a bit of a market breakdown."

Part of the problem, Mr. Terrazas said, is that high land and construction costs are making it difficult to build homes at lower price points, limiting the pool of buyers.

Overall, the housing market has settled into a pattern of rising prices and flattening sales throughout much of the peak homebuying season. A lack of new-home construction is dampening both new and existing home sales activity, despite a strong economy.

A typical new home spent just 2.9 months on the market in July, down from 3.6 months a year ago, suggesting demand remains strong and buyers are snapping up homes nearly as soon as they are finished.

Monthly new-home sales figures tend to be tumultuous, and so far this year the market for new homes has been gradually trending upward. Sales have risen 9.2% so far this year compared with the same period a year earlier.

"We're still on track for a pretty healthy increase in new home sales this year," said Lee Stafford, managing director of economics and research at Ally Financial Inc.

New-home construction has been dropping, with a significant slowdown in apartment building and gradual growth in new single-family home construction. U.S. housing starts declined for the fourth time in five months in July, the Commerce Department reported last week. Total housing starts decreased 4.8% from the previous month to a seasonally adjusted annual rate of 1.155 million.

But low inventory doesn't appear to be the only reason sales were weak last month. At the current sales pace, there was a 5.8-month supply of new homes on the market at the end of July, the highest level since 2015 although still below normal levels.

Recent surveys of consumer sentiment indicate that buyers also perceive the market as frothy. Home prices have risen sharply over the last couple of years, including in the new-home segment. The median sale price for a new home sold in July was $313,700, up 6.3% from a year earlier.

Builders remain largely optimistic about the market, saying they still see significant pent-up demand from millennials and other buyers who have been waiting on the sidelines until recently. Traffic from buyers visiting new-home communities remains strong, which suggests sales are poised to pick up in the months ahead.

Executives at Toll Brothers Inc., whose average-priced home is around $800,000, said on an earnings call Tuesday they are seeing increasing demand from first-time buyers even at high price points, because many have waited until later in life.

"The leading edge of the millennials are becoming of age to buy homes, and they are buying in their mid-30s, which means they're more affluent. And so I'm not surprised. I'm actually surprised at how slow the recovery has been. And that's why, I think, we have a lot of runway out in front of us," said Douglas Yearley, chief executive of Toll Brothers.

The National Association of Realtors reports sales of existing homes, which represent the bulk of the U.S. housing market, Thursday. Existing home sales fell 1.8% in June from the previous month to a seasonally adjusted annual rate of 5.52 million.

Write to Laura Kusisto at laura.kusisto@wsj.com and Sarah Chaney at sarah.chaney@wsj.com

 

(END) Dow Jones Newswires

August 23, 2017 12:23 ET (16:23 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.