New-Home Sales Decline in May Amid High Prices and Mortgage Rates

New-Home Sales Drop Due to High Prices and Mortgage Rates

New-home sales in the U.S. slumped significantly in May as persistent high prices and elevated mortgage rates continued to strain the housing market. According to government data released on Wednesday, sales of new single-family homes fell by 11.3%, reaching an annual rate of 619,000 units. This is the slowest pace since November, and it missed nearly all predictions from a Bloomberg survey of economists. The decline was uniform across the four major U.S. regions, reflecting widespread market challenges.

Affordability Issues Hamper Market Momentum

The current sales pace falls at the lower end of the range seen over the past year, indicating limited momentum in the market due to ongoing affordability issues. While mortgage rates dipped below 7% in mid-June for the first time since late March. They remain significantly higher than their levels at the end of 2021. Rates have more than doubled since then. This increase in borrowing costs has placed additional pressure on potential homebuyers, further dampening sales.

Despite these affordability challenges, a rise in available inventory has provided some relief. The median sale price for a new home decreased by 0.9% from a year ago to $417,400 in May, offering a slight reprieve for buyers. At the same time, the supply of available homes increased to 481,000 units, marking the highest level since 2008.

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Builders Adapt to Maintain Sales

Major homebuilders, including Lennar Corp. and KB Home, are actively addressing the affordability crisis by offering incentives such as mortgage rate buy-downs and price reductions. These strategies have proven effective in keeping their order books robust. Both companies reported profit gains in their recently completed second quarters. Lennar’s Chairman Stuart Miller underscored the long-term issue of housing shortages during a recent earnings call. He pointed to “over a decade of underproduction.”

Housing Demand Shows Signs of Recovery

Recent indicators suggest an improvement in overall housing demand this month. The Mortgage Bankers Association’s index of home-purchase applications has risen for the past three weeks. It reached its highest level since early February.

This uptick indicates a potential resurgence in buyer interest, despite the broader challenges facing the market.

Long-Term Housing Shortage Persists

Over the long term, the U.S. continues to grapple with a shortage of new homes. A limited supply of previously owned homes, still well below pre-pandemic levels, compounds this issue. High borrowing costs have discouraged many potential sellers from listing their properties, further constraining the market.

New-Home Sales: A Key Market Indicator

Analysts often view new-home sales as a more immediate measure of market health compared to sales of previously owned homes, which reflect data when contracts close. However, the new-home sales data can be volatile. The latest government report showed a 90% confidence interval that the change in new-home sales could range from a 26.8% decline to a 4.2% increase. This variability highlights the challenges in forecasting market trends amidst ongoing economic uncertainties.

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