New home sales surged 20% in May from a year ago

     New home sales surged in May, as buyers looked to new construction as an alternative to the low inventory of existing homes for sale.

Sales of newly constructed homes were up 12.2% in May from April, and up 20% from a year ago, according to a joint report from the US Department of Housing and Urban Development and the US Census Bureau.

May’s month-over-month gain is further evidence that the new construction market is being boosted by the exceptionally low inventory of existing homes for sale. Homeowners with ultra-low mortgage rates are reluctant to sell and buy another home at a much higher rate. Sales of existing homes have been down for the past few months, while new home sales have been rising.

Sales of new single‐family houses were at a seasonally adjusted annual rate of 763,000, up from a revised 680,000 in April. Sales were higher than last year’s estimated rate of 636,000.

Mortgage rates reached as high as 6.79% at the end of May as uncertainty moved through the financial industry due to the debt ceiling standoff. This increase in mortgage rates cooled mortgage applications.

In some good news for buyers, prices of new homes dropped from April, the report showed. The median price for a new home dropped to $416,300 in May, down from a revised $487,300 the previous month.

New home sales rose in every region of the country, with some of the largest monthly gains seen in the Northeast, South and West.

New home sales have been bolstered by a favorable mix of low inventory, builder incentives and resilient demand; however, that environment may not be that long-lasting, Oxford Economics’ US economists wrote in a note Tuesday.

“We don’t think the pace of sales can be sustained… and we expect new home sales to lose some momentum as the economy enters a recession and the labor market softens,” wrote economists Nancy Vanden Houten and Ryan Sweet.

However, if the housing market continues to accelerate, it could force the Federal Reserve to return to its interest-hiking ways, said Eugenio Aleman, chief economist for Raymond James.

After a string of 10 consecutive rate hikes, the Fed earlier this month opted to not raise rates and instead take a pause to review the economic landscape.

“The May new home sales report also shows that the Federal Reserve may want to increase interest rates higher because current mortgage rates don’t seem to be high enough to slow down the sector and could pose a threat to the current disinflationary process going forward,” Aleman said.

Source:CNN