New Home Sales Plummet as Mortgage Rates Cloud Market Outlook

In a startling shift, sales of new single-family homes fell by 13.7% in May, landing at an annualized rate of 623,000 units, according to recent data from the U.S. Census Bureau. This downturn not only represents a notable decline from the previous month but also marks a 6.3% drop compared to the same month last year, significantly underperforming expectations set by Wall Street analysts who predicted sales of around 695,000 units.

High Mortgage Rates Stifle Demand

The figures reflect the persistent pressure of high mortgage rates on buyer decisions. The average rate for a 30-year fixed mortgage hovered around 6.83% at the month’s outset, peaked above 7% mid-month, and concluded at approximately 6.95%. According to Bradley Saunders, an economist at Capital Economics, this dip in new home sales “cancels out all of the positivity” seen in earlier months, underscoring how elevated rates limit buyer activity.

Homebuilders are feeling the pinch too. As Stuart Miller, co-CEO of Lennar, noted, “the macro economy remains challenging.” High borrowing costs have affected affordability, diminishing actionable demand across the housing sector. Although Lennar has resorted to lowering prices in response, KB Home chose a different route, recently increasing their prices, reflecting a divide in strategies amongst builders.

Skyrocketing Supply Raises Concerns

The drop in sales has inevitably impacted inventory levels, with new homes available for sale soaring to 507,000 by the end of May. This represents a staggering 9.8-month supply at the current sales rate, a steep 15% increase from May 2024. Such inventory levels haven’t been seen since the summer of 2022, shortly after the Federal Reserve began tightening monetary policy post-pandemic.

The last time supply levels reached this high was during the subprime mortgage crisis and the Great Recession in 2009. The median price of a new home sold in May was $426,600, approximately 3% higher than the previous year. This juxtaposition of rising prices amid escalating supply presents a perplexing scenario for the housing market.

As the economic landscape evolves, analysts will be monitoring these trends closely. With persistent uncertainties—ranging from inflation to shifts in consumer confidence—many wonder how long these challenging conditions will persist. The future of the housing market remains uncertain, particularly as prospective buyers weigh affordability against the backdrop of soaring mortgage rates.