U.S. Home Sales Decline Amid Record Prices and Rising Mortgage Rates

U.S. existing home sales continue to drop for the third month in a row due to record-high prices and increasing mortgage rates, but a surge in housing inventory offers hope for potential buyers.

U.S. existing home sales experienced a third consecutive month of decline in May, with factors such as record-high prices and a resurgence in mortgage rates deterring potential buyers from entering the market. Despite this, there was a glimmer of hope in the housing market as the National Association of Realtors revealed that housing inventory saw a significant increase last month, reaching its highest level in nearly two years. This rise in supply, if sustained, could potentially help to curb further price hikes and enhance affordability for buyers.

However, the weak home sales data, coupled with a notable decrease in housing starts and building permits in May, suggests that the re-acceleration of mortgage rates from April to May has dampened the momentum of the housing market recovery. Economists had predicted a decline in home resales to a rate of 4.10 million units, but the actual figure showed a 0.7% drop to a seasonally adjusted annual rate of 4.11 million units. Year-on-year, home resales decreased by 2.8% in May.

The average rate on the 30-year fixed mortgage peaked at 7.22% in early May before easing slightly to just below 7.0% by the end of the month, according to data from Freddie Mac. The Federal Reserve has maintained its benchmark overnight interest rate in the 5.25%-5.50% range since last July, having raised it by 525 basis points since March 2022. While residential investment saw double-digit growth in the first quarter, it is expected to have a negative impact on gross domestic product this quarter.

Sales in the South dropped by 1.6%, while they remained unchanged in the Midwest, Northeast, and West regions. Housing inventory saw a notable 6.7% increase to 1.28 million units in May, marking the highest level since August 2022. Supply surged by 18.5% compared to the previous year, with Texas and Florida experiencing a significant inventory boost, partly attributed to rising costs such as property insurance.

Despite the rise in supply, the median existing home price soared by 5.8% year-over-year to a record high of $419,300 in May. Around 30% of homes were sold above the listing price, indicating that multiple offers are still prevalent in certain areas. Properties across all regions saw price increases, with homes typically staying on the market for 24 days in May, up from 18 days a year ago.

First-time buyers accounted for 31% of sales, below the 40% threshold considered ideal for a robust housing market. All-cash sales made up 28% of transactions, while distressed sales remained at 2%. Despite the challenges in the housing market, the broader economy continues to show resilience, with signs of cooling inflation and expansion in the private sector.

While the U.S. housing market faces challenges such as declining sales and rising prices, the increase in housing inventory and signs of economic stability provide hope for a potential turnaround in the near future.