Recently in City X, developers have stopped buying land, contractors

There are some problems in this question but nevertheless answer is (A).

Premises:

Developers have stopped buying land,
Contractors have found themselves going without work for longer periods,
Banks have issued fewer mortgages.
(So fewer homes are getting constructed and bought)

Conclusion: There must be fewer new residents moving to City X than there were previously.

A. This year several housing blocks have gone on the market after being held up for months by legal red tape.
Many previously built housing units which were on hold have flooded the market leading to oversupply. Hence, it explain that developers and contractors are out of work. But it doesn't address the banks issuing fewer mortgages. With the banks in the picture, the argument shows us that fewer people are buying houses. The conclusion is that fewer new people are coming to city X. There could have been a much better weakener which explains that people are not buying houses because of the reduced rents or something similar. But this does go on to explain a part of the situation (fewer homes are getting constructed) so in case there is no other better option, we will go with this.

B. The average size of a new home has increased significantly over the past several years.
Size of the homes is out of scope. We are only concerned about the number of homes.

C. Re-sales of condominiums have increased over the past six months.
You might think that this explains why developers and contractors are out of work since new people could be buying old houses but people who are selling their houses would need new houses in this case. Hence it does not explain developers, contractors and bankers out of work. It doesn't weaken our conclusion much except if most people had multiple homes and are selling out of those. In that case, it would be similar to option (A) where it would explain fewer new constructions. But expecting most people to have multiple homes is too much of an assumption. So option (A) is better.

D. The cost of materials such as lumber and cement has decreased over the past year.
This should encourage more construction, not less. Hence, not relevant.

E. Sales of other big-ticket items, such as automobiles and boats, has remained steady over the past year.
Out of scope. Perhaps people have started buying more automobiles and boats, we don't know. The relation between homes and other big ticket items is not known.

Answer (A)