New home sales surge

New home sales surged 12.8% in May after April sales figures were revised slightly lower. Sales are captured at the contract signing, giving a more real-time depiction of housing market activity. The uptick in sales was concentrated in homes sold between $400,000-$750,000. While homebuilders have been savvy in capturing more market share due to the lack of existing inventory, the beneficiaries have been those who can afford the premium on a newly built home. Most first-time buyers are still sidelined.

Newly built homes now account for about a third of all available homes on the market. That ratio was significantly lower prior to the pandemic. Newly built inventory available for sale now sits at a 6.7-month supply at the current sales pace, which is close to being a balanced market. Builders have been quicker than home sellers to react to changing market conditions and offer incentives to get buyers in the door.

Mortgage applications remain subdued compared to year-ago levels; applications plunged in March of last year when the Federal Reserve first embarked on its rate hiking cycle. Applications bottomed out at the end of last year. We expect to see favorable year-on-year comparisons start to show up in the data by the end of this year. Mortgage applications to purchase a home have ticked up slightly in the first two weeks of June while the 30-year fixed mortgage rate has hovered around 6.7% for most of the month. When the mortgage rate starts to flirt with 7%, we tend to see a pullback in mortgage applications.

Separately, existing home sales, which are a lagging indicator because they are captured at the contract closing, rose a tepid 0.2% in May after falling for two consecutive months. Positive sales came from the South and the West. Sales remain 20% below year-ago levels as lack of inventory remains the greatest hurdle to potential home buyers. The demographics favor a strong housing market but listings are still 50% below pre-pandemic levels.

Housing inventory in the resale market has been sitting at about a three-month supply, about half of what is needed to clear the market. Inventory is especially tight in the under $400,000 price range, where bidding wars are still occurring. 

Nationally, home prices have been cooling as high mortgage rates have been taking a bite out of would-be buyers’ ability to bid up prices. According to S&P CoreLogic Case Shiller’s home price index in April, prices are down 2.4% from their peak of June 2022. However, month-to-month home price growth has been positive, pointing to a bottoming of home prices. Some markets in the country, especially in the South, have yet to see home prices fall.