Sales of newly built homes struggle in November

Mortgage applications to purchase a newly built home dropped dramatically in November, signaling a slowdown in sales for the nation's builders.

Application volume fell 22 percent from October, according to the Mortgage Bankers Association. The change does not include any seasonal adjustments, but when compared to one year ago, these applications are down 11.9 percent. While home sales usually slow in the winter months, the numbers appear to echo sentiment from some home builders.

A worker builds a new home at a housing development in Phoenix, Arizona.
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A worker builds a new home at a housing development in Phoenix, Arizona.

"There was less urgency in the last quarter," Ara Hovnanian, CEO of New Jersey-based K Hovnanian Homes, told analysts Wednesday, after the company reported quarterly earnings. "Given the gains we've seen in 2014 in employment, we would have expected housing demand to be stronger then the low levels we are currently experiencing."

Since the majority of newly built homes are purchased with financing, mortgage applications are a good indicator of sales for the month.

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The Mortgage Bankers said new single-family home sales were running at a seasonally adjusted annual rate of 401,000 units in November, a decrease of 13 percent from October. The U.S. Commerce Department will report its count of November new home sales on Dec. 23.

As both K Hovnanian and Pennsylvania-based Toll Brothers reported this week, the average price of a newly built home sold in the fourth quarter of this year rose significantly. That is also evident in the mortgage numbers.

"Average loan size increased to almost $307,000 in November from roughly $300,000 in October, indicating that builders are having greater success with higher priced homes and difficulty at the entry level, as first-time buyers continued to face tight credit conditions," Mortgage Bankers Chief Economist Michael Fratantoni said in a statement.

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The builders confirm they are not raising prices, but instead are seeing far more interest from wealthier buyers looking at larger homes. Builders did raise prices in 2013, and some admit they went too far. Toll, a luxury home builder whose average sale price was a high $747,000 in the latest quarter, does not expect to raise prices much next year.

"As we look at 2015, the house we sell today is going to struggle to be marginally accretive. We just don't have the pricing power to improve the margin," Toll CEO Douglas Yearley Jr. said.

The same is true of nonluxury builders, like K Hovnanian.

"I'd like to say we raised prices, but the increase was primarily due to geographic and product changes," Hovnanian said.