New home sales posted the sharpest drop in 18 months, but there’s a silver lining
New home sales plunged to a six-month low in May as elevated mortgage rates and high prices spook potential buyers.
According to the Department of Commerce, new single-family home sales declined by 11.3% to a 619,000 annual pace, the slowest since November. It was also the biggest monthly drop since September 2022.
Sales were down across all four major regions, including a staggering 43.8% drop in the Northeast.
The lackluster report had at least two silver linings: first, the sales pace for April was upwardly revised to 698,000 units from the originally reported 634,000 units.
More importantly, the latest data showed that the inventory of new homes increased to 481,000, the highest level in 16 years.
New builds account for around 13% of the U.S. housing market, but this segment has attracted more interest from traditional buyers who are frustrated with the lack of options in existing homes.
With a higher supply, new homes could potentially become less expensive moving forward. But analysts aren’t convinced that will be enough to lure inflation-weary buyers back into the market.
Mortgage rates remain too high
Although the U.S. housing market desperately needs a better supply-demand balance, experts warn that mortgage rates are the biggest factor holding back home sales.
“New home sales may continue to be subdued until we see a more substantial decline in mortgage rates,” said Nancy Vanden Houten, the lead U.S. economist at Oxford Economics.
“We do expect a modest rebound in sales later in the second half of this year when we look for mortgage rates to decline more decisively below 7% once Fed rate cuts get underway,” she explained.
Richard de Chazal, a macro analyst at William Blair, said the latest new home sales report should provide “further evidence to the Fed that monetary policy is too restrictive and it will be time to start lowering rates in the coming months.”
But it’s not clear that the Fed sees it that way.
Central bankers have penciled in just one rate cut this year as they remain focused on taming inflation. Because of that, analysts at the Mortgage Bankers Association and National Association of Realtors don't expect lower mortgage rates this year.
According to Bank of America, the housing market is stuck because of a mortgage “lock-in” effect that’s keeping existing homeowners and buyers on the sidelines.
The bank’s analysts said market conditions will remain difficult so long as current mortgage rates remain above the “effective” rates that buyers locked into before and during Covid.
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