CREDIT TO: LUCIA MUTIKANI AND LINDSAY DUNSMUIR, REUTERS, JUNE 24, 2022.
Sales of new U.S. single-family homes unexpectedly rose in May, but the rebound is likely to be temporary as home prices continue to increase and the average contract rate on a 30-year fixed-rate mortgage approaches 6%, reducing affordability.
While the report from the Commerce Department on Friday also showed new home supply hitting a 14-year high last month, overall housing inventory remains significantly low. The rise in sales after four straight monthly declines, likely reflected buyers rushing to lock in mortgage rates in anticipation of further increases. A survey this month suggested homebuilders expected weaker sales in June.
“We suspect May’s surprisingly strong new home sales will prove to be the last hurrah for new home sales this year,” said Mark Vitner, senior economist at Wells Fargo in Charlotte, North Carolina.
New home sales jumped 10.7% to a seasonally adjusted annual rate of 696,000 units last month. April’s sales pace was revised higher to 629,000 units from the previously reported 591,000 units. Sales surged in the West and the densely populated South, but declined in the Midwest and Northeast.
Economists polled by Reuters had forecast that new home sales, which account for 11.4% of U.S. home sales, would fall to a rate of 588,000 units. Sales dropped 5.9% on a year-on-year basis in May. They peaked at a rate of 993,000 units in January 2021, which was the highest level since the end of 2006.
The average contract rate on a 30-year fixed-rate mortgage increased this week to more than a 13-1/2-year high of 5.81%, from 5.78% last week, according to data from mortgage finance agency Freddie Mac. The rate has risen more than 250 basis points since January, amid a surge in inflation expectations and the Federal Reserve’s aggressive interest rate hikes.
There was, however, some encouraging news on the inflation front. While a survey from the University of Michigan on Friday confirmed consumer confidence plunged to a record low in June, consumers’ inflation expectations moderated a bit.
The University of Michigan said its final consumer sentiment index fell to 50.0 from a preliminary reading of 50.2 earlier this month. It was down from 55.2 in May.
The survey’s one-year inflation expectation was unchanged from May at 5.3%, but ticked down from a preliminary June reading of 5.4%. The five-year inflation outlook edged up to 3.1% from 3.0% in May, but was down from 3.3% earlier in June.
The increase in the preliminary inflation expectations and jump in annual consumer prices were behind the Fed’s decision last week to raise its policy rate by three-quarters of a percentage point, its biggest hike since 1994.
“Fed officials will breathe a sigh of relief,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “There is nothing in today’s data to change market expectations for another 75-basis-points rate hike in July.”
Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. U.S. Treasury yields rose.
Data this week showed sales of previously owned homes fell to a two-year low in May. Housing starts and building permits also declined last month, though they remained at high levels. But cooling demand could help to bring housing supply and demand back into alignment and slow price growth.
The median new house price in May accelerated 15.0% from a year ago to $449,000. There were 444,000 new homes on the market at the end of last month, the highest number since May 2008 and up from 437,000 units in April.
Houses under construction made up roughly 65.8% of the inventory, with homes yet to be built accounting for about 25.9%. At May’s sales pace it would take 7.7 months to clear the supply of houses on the market, down from 8.3 months in April.
“Going forward, we expect homebuilders to be willing to offer more incentives and discounts to support sales in a rising mortgage rate environment,” said Doug Duncan, chief economist at mortgage finance agency Fannie Mae.