New Home Supply Hits 16-Year High Amid Sales Decline

Sales of new U.S. single-family homes dropped to a six-month low in May, falling 11.3% as rising mortgage rates dampened demand, according to the Commerce Department. This marked the largest decline in sales in more than a year and a half. However, a sharp upward revision of April’s data showed sales rising instead of falling, softening the impact of May's decline. The housing market has been significantly affected by the Federal Reserve's aggressive interest rate hikes since March 2022, although it showed signs of recovery starting in the third quarter of last year due to a shortage of previously owned homes. Despite the current slump, the supply of new homes has reached its highest level in over 16 years, which could help alleviate affordability issues. The average rate on a 30-year fixed-rate mortgage hit a six-month high of 7.22% in early May before slightly retreating to 7.03% by the end of the month. Financial markets are anticipating rate cuts by the Federal Reserve starting in September, although the Fed has recently adopted a more hawkish outlook, maintaining its benchmark overnight interest rate in the 5.25%-5.50% range since July. Market Overview:

• U.S. new home sales fall 11.3% in May.
• April sales data revised sharply higher.
• Median house price slips 0.9% to $417,400 from a year ago.

Key Points:

• Highest supply of new homes in over 16 years.
• Mortgage rates hit a six-month high in May.
• Financial markets expect Fed rate cuts starting in September.

Looking Ahead:

• Anticipated rate cuts could boost home sales in the second half of the year.
• Rising supply may improve housing affordability.
• Ongoing monitoring of Fed's monetary policy and its impact on the housing market.

The drop in new home sales is a significant indicator of the housing market's sensitivity to interest rate fluctuations. Despite this, the market is showing resilience with a substantial increase in supply, which could help mitigate affordability issues. The median new house price fell 0.9% from a year ago, and nearly half of the new homes sold last month were priced under $399,000. A survey from the National Association of Homebuilders indicated that builders are constructing smaller homes and cutting prices to attract buyers. Regional variations in home sales were notable, with sales plunging 43.8% in the Northeast and slipping 4.5% in the West. Sales fell 12.0% in the South and decreased 8.6% in the Midwest. The overall increase in supply, with 481,000 new homes on the market, could help stabilize prices and make home buying more accessible. The overhang of new home listings is expected to keep a lid on house price increases in the second half of 2024, contributing to cooler inflation in 2025.