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  • Writer's pictureRealFacts Editorial Team

US Sales of New Houses Drop for Second Straight Month


People building houses

The housing market faced another setback in May as sales of newly built single-family houses in the United States fell short of expectations. This continues a trend of disappointing economic reports that have some analysts speculating the Federal Reserve may soon consider cutting interest rates.


According to data released Wednesday by the U.S. Census Bureau and the Department of Housing and Urban Development, May sales for new single-family houses reached a seasonally adjusted annual rate of 619,000. This figure represents the lowest level since November and marks an 11.3% decrease from the revised April total of 698,000. Compared to the May 2023 estimate of 741,000, this represents a significant drop of 16.5%.


Analysts had predicted that sales of newly built houses would reach 650,000 in May, following a month where sales figures also fell short of expectations. This continuing trend is causing concern among economists and market watchers.


Challenges and Adaptations


The housing market is being significantly affected by mortgage rates, which are currently hovering near 7%. These high rates are dampening demand and affecting homebuilder confidence. Despite these challenges, some of the largest builders, including Lennar, KB Home, and Toll Brothers, have managed to report positive quarterly earnings. They achieved this partly through offering incentives to buyers.


Easing mortgage rates has not been sufficient to spur a significant increase in loan applications. Many existing homeowners are reluctant to sell their properties and give up the historically low mortgage rates they secured during the pandemic. This has pushed buyers toward newly built houses, where they can take advantage of mortgage-rate buy-downs and other incentives offered by builders. In a mortgage rate buy-down, builders use profits from sales to lower the interest rate paid by the buyer, making homes more affordable.


The report on new single-family home sales noted that the inventory of new homes has grown to a supply of 9.3 months. This increase is attributed to the lack of resale homes on the market. Despite this, the combined inventory for new and existing single-family houses remains at a seller-friendly 4.4 months’ supply, according to Robert Dietz, chief economist for the National Association of Home Builders.


Economic Implications and Future Projections


The latest sales report follows a decline in sales of existing homes, with the supply of those houses reaching a four-year high in May. This situation places the Federal Reserve in a challenging position. While a rate cut could help homebuyers, it could also exacerbate inflation on everyday goods and services, according to Sean Salter, a finance professor at the Jones College of Business at Middle Tennessee State University.


"The Fed is in a difficult position," Salter explained to CoStar News. "This is a very tough balancing act."


Oxford Economics has suggested that new home sales might remain weak through the third quarter before rebounding in the fourth quarter, contingent on the anticipated Fed rate cut. "Relative to existing home sales, new home sales should continue to benefit from more supply and homebuilder incentives," Oxford said. They also noted that the trend of decreasing home sizes could make homebuying more affordable for a broader group of buyers.


However, Wells Fargo issued a cautionary analysis, noting that "a deteriorating macroeconomic backdrop marked by higher unemployment and slower income growth will likely continue as headwinds for the new home market."


Looking Ahead


The housing market remains in a state of flux, with multiple factors influencing both supply and demand. Builders and buyers alike are navigating a complex landscape of high mortgage rates, limited resale inventory, and economic uncertainty. As the Federal Reserve weighs its next moves, the housing market's future hangs in the balance, with potential rate cuts offering both opportunities and risks for the broader economy.

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