The real estate market is feeling the pinch. In May, sales of new single-family homes took a nosedive, plummeting by 13. 7% compared to April. This drop brought the sales figure down to 623, 000 units on a seasonally adjusted, annualized basis. To put that into perspective, it's not just lower than last month but also 6. 3% below May 2024. It's also lagging behind the six-month average of 671, 000 and the one-year average of 676, 000. Even the pre-pandemic average in 2019 looks better at 685, 000 units sold.

Wall Street had higher hopes, expecting May new home sales to hit 695, 000. But the reality was quite different. These numbers are based on signed contracts, meaning people were out shopping in May when mortgage rates were stubbornly high. The average rate on the 30-year fixed mortgage started May at 6. 83%, climbed to just over 7%, and then settled back at 6. 95% by the end of the month.

High mortgage rates are taking a toll on buyer activity. Economists note that buyer enthusiasm can only go so far when mortgage rates are hovering around 7%. Homebuilders are feeling the heat too. Recent quarterly earnings reports highlight how high rates are making homes less affordable. One CEO mentioned that consumer confidence is shaky due to various uncertainties, both domestic and global. This has led to a softening demand for new homes.

Interestingly, some homebuilders are responding differently to the market conditions. While Lennar reported lowering prices, KB Home decided to raise theirs. Despite these strategies, the median price of a new home sold in May was $426, 600, which is 3% higher than the year-earlier price.

Slower sales have led to a significant increase in supply. At the end of May, there were 507, 000 new homes for sale. This represents a 9. 8-month supply at the current sales rate, which is 15% higher than May 2024. The last time supply was this high was briefly in the summer of 2022, after the Federal Reserve started raising interest rates post-pandemic. Before that, you'd have to go back to 2009, amid the subprime mortgage crisis and the Great Recession, to see such high supply levels.

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