By Laura Kusisto and Ben Leubsdorf

New home sales posted a steep decline in December, an indication that affordability challenges are beginning to cut into demand.

Purchases of newly built, single-family houses, which account for a small share of overall U.S. home sales, decreased 10.4% from November to a seasonally adjusted annual rate of 536,000 last month, the Commerce Department said Thursday.

That was the slowest monthly sales pace since February and the steepest one-month drop since March 2015.

Economists surveyed by The Wall Street Journal expected new home sales to decline 1.5%, to 583,000 sales.

Data on new-home sales can be imprecise and volatile from month to month. December's 10.4% salesdecrease came with a margin of error of 12 percentage points.

In all, an estimated 563,000 new homes were sold in 2016, up 12.2% from a year earlier and the fifth straight year of sales growth. The annual figure indicates broad improvement in the market, even if sales of new homes remain well below where they were during the housing boom of the 2000s, when they topped 1 million a year for four years running.

Economists expect new home sales to continue to increase this year as builders step up construction of single-family homes. Housing starts rose 11.3% in December to a seasonally adjusted annual rate of 1.23 million, the Commerce Department said last Thursday. Overall last year single-family starts were up 9.3% in 2016, but construction of buildings with five or more units fell 3.1%.

One factor holding back demand is that land, construction and regulatory costs have driven up prices for finished single-family homes beyond what many families can afford. The median sales price of a newly built home was $322,500 in 2016, up from $288,900 a year earlier.

Rising mortgage rates are expected to make the cost of buying a home this year even higher.

Average rates for 30-year fixed mortgages rose from roughly 3.5% around Election Day to 4.32% at the end of December, according to mortgage company Freddie Mac. In the past week they averaged 4.19%, Freddie Mac said Thursday.

Sales of existing homes fell 2.8% in December, propelled by higher mortgage rates, rising prices and a lack of homes for sale, the National Association of Realtors said Tuesday.

Write to Laura Kusisto at laura.kusisto@wsj.com and Ben Leubsdorf at ben.leubsdorf@wsj.com

(END) Dow Jones Newswires

January 26, 2017 10:57 ET (15:57 GMT)

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