US new home sales drop 7.8% in May to a five-month low

US new home sales decline in May by 7.8% after economists expected sales to rise 1.9%.

US new home sales fell by 7.8% to a seasonally adjusted rate of 626,000 units in May, according to the US Census and the US Department of Housing and Urban Development. The statistic is worse than April’s upwardly revised new home sales of 679,000 units. US new home sales reached the lowest level since December 2018.

Why did US new homes sales decline in May?

Even though mortgage rates are low at 3.8%, new home sales have declined as housing costs have risen and existing home sales increased 2.5%.

Buck Horne, homebuilding analyst at Raymond James, believes that new homes can’t compete against more affordable existing houses for sale.

‘The lower mortgage rates haven’t unleashed a new wave of demand. It’s harder for the builders to compete against resale inventory that is priced significantly below where their asking price is now,’ said Horne.

John Pataky, TIAA Bank's executive vice president, noted that land and labor issues are also contributing to a decline in new home sales.

‘Across the market, the material decline in 30-year mortgage rates has pushed back against some of the negative trends we’ve seen such as land and labor shortages,’ said Pataky.

What do real estate experts say about the US housing market?

Pataky says that the mixed housing data of low new home sales and high existing home sales will continue unless there are major changes in the housing market.

‘Unless there is a strong uptick in construction or a further drop in [mortgage] rates, the pattern of “two steps forward, one step back” results we’ve seen in the new home market will carry on,’ added Pataky.

Matthew Speakman, economist with real estate website, Zillow.com, is hopeful that homebuyers will purchase new homes because of low mortgage rates.

‘Purchase mortgage applications have been underwhelming, but it could still be a matter of when, not if, buyers will take advantage of stubbornly low mortgage interest rates that don’t look set to rise meaningfully for the foreseeable future,’ said Speakman.

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