By Laura Kusisto and Sarah Chaney 

WASHINGTON -- Sales of previously owned U.S. homes in January experienced their sharpest annual drop in more than three years as low inventories and rising prices and interest rates took a toll.

Existing-home sales fell 3.2% in January from the previous month to a seasonally adjusted annual rate of 5.38 million, the National Association of Realtors said Wednesday. Economists had expected sales to improve modestly last month after sales also declined in December.

Compared with a year earlier, sales in January were down 4.8%, the steepest annual decline since August 2014.

"Folks are looking at these ... hot markets. Prices are going up, there are fierce battles and all these homes are going for more than the asking price," said Alex Villacorta, executive vice president of HouseCanary, a housing data and analytics startup. "If you have a home at a really good mortgage rate, you're less inclined to give that up to get into a market that feels like 2004."

The drop was surprising given that pending home sales increased slightly over the past two months, which typically predicts an uptick in existing home sales. David Berson, chief economist at Nationwide Insurance, said this might partly reflect buyers who experienced "rate shock" when mortgage rates rose and they were unable to close.

The average rate nationwide for a 30-year, fixed-rate mortgage climbed roughly a quarter of a percentage point to 4.22% by the beginning of February from 3.95% at the beginning of January, according to mortgage-finance giant Freddie Mac. Rates on Thursday stood at 4.38%, according to Freddie Mac. Borrowing costs still remain low by historical standards.

"I still think we will see the job market and demographics overcome the rise in mortgage rates and give some upward movement in home sales, but much less than in the past because the number of homes for sale is so small," Mr. Berson said.

The tax-code overhaul passed in December limited deductibility of very large mortgages as well as state and local taxes, including property-tax bills. Mr. Yun said tax reform doesn't appear to be denting home sales yet, as buying activity remains strong in expensive regions and prospective buyers expressed limited concern to their Realtors, according to NAR.

A shortage of available houses on the market has driven up prices in many regions. There was a 3.4 month-supply of homes on the market at the end of January, based on the current sales pace. Total housing inventory declined in January from a year earlier to 1.52 million existing homes for sale, the lowest January count since 1999 when the agency began tracking the data.

Earlier in the year, strong home sales seemed to be "defying gravity" given low levels of inventory. "That's clearly been exhausted now," said Aaron Terrazas, senior economist at home-listings website Zillow. News Corp, owner of The Wall Street Journal, also operates Realtor.com under license from the National Association of Realtors.

Several factors are converging to buttress demand. The national unemployment rate in January was 4.1%, holding at a 17-year low. Gauges of household confidence remain elevated.

But limited inventory on the market is driving up home prices at a rapid pace, potentially blocking some would-be buyers. The median sale price for an existing home in January was $240,500, up 5.8% from a year earlier.

In several of the largest metropolitan areas, a household making a typical salary would have to spend more than 30% of their income -- a level that economists consider financially sustainable -- to afford the median home payment, according to HouseCanary.

In some of the fastest-growing and priciest metropolitan areas, affordability barriers are much steeper. A typical buyer in San Francisco, for example, would need to spend 75% of household income to afford a home.

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

 

(END) Dow Jones Newswires

February 21, 2018 13:15 ET (18:15 GMT)

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