Higher Rates Sideline Home Buyers

Mortgage rates that averaged 7.06% in May per Freddie Mac, the highest monthly average since last November, put a damper on new home sales last month.

Sales of newly built, single-family homes in May fell 11.3% to a 619,000 seasonally adjusted annual rate from a sharp upwardly revised reading in April, according to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The pace of new home sales in May is down 16.5% from a year earlier and is the lowest pace since November 2023.

Persistently high mortgage rates in May kept many prospective buyers on the sidelines. However, significant unmet demand exists, and we expect mortgage rates to moderate in the coming months, which will bring more buyers into the market.

New single-family home inventory increased 1.5% in May to a level of 481,000, up 12.9% compared to a year earlier. This represents an 9.3 months’ supply at the current building pace. However, due to a lack of resale homes for sale, the combined inventory for new and existing single-family homes remains lean at a 4.4 months’ supply, according to NAHB estimates. Total months’ supply was 4.1 in April and 3.6 in May 2023.

A new home sale occurs when a sales contract is signed, or a deposit is accepted. The home can be in any stage of construction: not yet started, under construction or completed. In addition to adjusting for seasonal effects, the May reading of 619,000 units is the number of homes that would sell if this pace continued for the next 12 months.

Due to declines in new home size and some builder use of incentives, the median new home price fell to $417,400, down almost 1% from a year ago.

Regionally, on a year-to-date basis, new home sales are up 6.0% in the Northeast, 25.2% in the Midwest and 6.3% in the West. New home sales are down 7.6% in the South.

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