Sale prices for newly built homes fell 1 percent year over year to a median of $363,900 in the first quarter, the first such drop in seven years, according to a new report from Redfin, a technology-powered real estate brokerage.

Sales of new homes were down 3.1 percent year over year in the first quarter, the third consecutive quarter of declines. Supply of new homes was up 4.2 percent in the first quarter, the fourth consecutive period of increases.

The small declines in new-home sale prices and sales and the rise in supply were expected. Redfin first reported that demand for new homes was cooling in the second half of 2018 as builders started dropping prices and offering incentives to agents and buyers showing interest in new construction, such as free design upgrades. 

Connie Durnal, a Redfin agent in Dallas, said builders are now using other methods to lower prices for new homes in her area, such as smaller lot sizes and including fewer upgrades in spec homes (those that are built without a buyer lined up). Lowering prices is part of an effort to sell some of the new-home inventory that's been piling up in Dallas (supply of new homes in the Dallas metro was up 14.7% in the first quarter).

"The market for new homes is shifting. Builders are readjusting their pricing to be more competitive, both in low-end and high-end homes. Some of my clients have been able to buy new homes at prices we never could have negotiated a year ago," Durnal said. "One reason builders are able to offer homes for lower prices is because in some cases, they're building on smaller lots farther away from the city center, like in the northern suburbs. They're also reducing monetary incentives such as design center credits and built-in blinds in favor of offering the home for sale at a lower price. That way, builders end up netting the same amount of money on a sale but homebuyers may feel that they're getting a better price."

New construction is a key ingredient in the affordability of housing markets, but it is limited by the labor supply of construction workers. In a separate analysis, Redfin determined the share of homes affordable on the median personal income for construction workers in some of the nation's largest metros.

St. Louis is the most affordable place for a construction worker to buy a home, with 67.3 percent of homes for sale affordable on the median personal income for construction workers in the area, the highest share of any U.S. metro. It's followed by two Midwestern neighbors, Cleveland (64.7%) and Chicago (62.5%). Those metros are also relatively affordable for the population as a whole: In all three places, more than half of homes for sale are affordable on the area's median household incomes.

A typical construction worker would find it near impossible to find a home they could afford to buy in any major California metro. In San Jose, just 0.1 percent of homes for sale are affordable on a local construction worker's median income, making it the least affordable metro for construction workers, followed by San Diego (1.5%) and San Francisco (1.8%). The fact that less than 20 percent of homes for sale in each California metro covered by this analysis (Los Angeles, Sacramento and Riverside, in addition to those already listed) are affordable for construction workers is representative of the larger housing crisis in the entire state. Between 2010 and 2018, California built the fewest apartments and for-sale housing units per new resident of any state except Arizona, with just one unit for every 3.1 newcomers (Arizona built one new unit for every 3.2 newcomers). Other states averaged around one new unit for every two new residents during the same time period.

San Jose provides an example of the housing affordability problems associated with a lack of supply. Although inventory has been recovering in recent months, the market continues to feel the effects of 15 consecutive months of double-digit supply declines through mid-2018. The lack of inventory drove prices from a median of $820,000 at the beginning of 2017 to more than $1.1 million last month.

Meanwhile, wages for construction workers in San Jose have hardly risen. Annual salaries hovered around $60,000 throughout 2017 and 2018, about 12 percent higher than they were in 2012. Home prices in the area more than doubled from 2012 to 2018.

"It might seem like the solution to the housing shortage is straightforward—just build more homes—but in many California metros construction workers aren't paid enough to cover their own housing costs, which makes attracting construction workers to build those homes quite difficult," said Redfin chief economist Daryl Fairweather. "To solve the housing crisis, the government needs to step up and subsidize new construction. Some voters might find it distasteful to give wealthy developers subsidies, but those subsidies could come with strings attached like higher pay for working-class construction workers."