US new home sales plummet as mortgage rates surge

Sales of new U.S. single-family homes fell to a six-month low in May due to rising mortgage rates, signaling a faltering housing market recovery. The Commerce Department reported an 11.3% drop to an annual rate of 619, 000 units, the lowest since November. This decline, the largest in over a year and a half, came alongside a sharp upward revision of April’s data, now showing a rise in sales to 698,000 units, a nine-month high.

The housing market, hit hardest by the Federal Reserve’s aggressive rate hikes since March 2022, had started recovering in the third quarter of last year due to a shortage of previously owned homes. However, the recent resurgence in mortgage rates has dampened both new and previously owned home sales and homebuilding.

“Today’s report will further signal to the Fed that monetary policy is restrictive, suggesting it might be time to start lowering rates in the coming months,” said Richard de Chazal, a macro analyst at William Blair.

Despite the bleak sales figures, the inventory of new homes rose to its highest level in over 16 years, with 481,000 new homes on the market at the end of May. This increase in supply, coupled with an average 30-year fixed mortgage rate reaching 7.22% in early May, indicates continued challenges for homebuyers.

The downturn in new home sales, which account for 13.1% of U.S. home sales, is seen as a leading indicator of the housing market’s trajectory. Sales dropped 16.5% year-on-year in May. Despite the decline, residential investment contributed significantly to the economy’s 1.3% growth rate in the first quarter. Economists at Goldman Sachs adjusted their second-quarter GDP growth estimate down to 1.8% from 1.9% based on the new data.

Regional breakdowns show significant declines: a 43.8% plunge in the Northeast, a 4.5% slip in the West, a 12.0% drop in the South, and an 8.6% decrease in the Midwest. Meanwhile, the median new house price fell 0.9% to $417,400 in May compared to the previous year.

Despite the immediate challenges, some analysts foresee a modest rebound in sales later in the year as mortgage rates potentially decline below 7% with anticipated Fed rate cuts. For now, builders are focusing on constructing smaller homes to meet buyers’ budgets, and the increased supply could help improve housing affordability.

“Rising supply might keep house price increases in check in the second half of 2024, making homebuying slightly less unaffordable and contributing to cooler inflation in 2025,” said Bill Adams, chief economist at Comerica Bank.

As the housing market navigates these turbulent waters, the Fed’s policy decisions in the coming months will be crucial in shaping its future trajectory.