- Sales of new homes fall 13.7% in May, biggest drop since June 2022
- New housing inventory highest since late 2007
- Median new house price increases 3.0% to $426,600 from year ago
WASHINGTON, June 25 (Reuters) - Sales of new U.S. single-family homes fell by the most in nearly three years in May as high mortgage rates and rising economic uncertainty sapped demand, lifting the supply of unsold houses on the market to the highest level since late 2007.
The larger-than-expected decline in sales reported by the Commerce Department on Wednesday added to weak homebuilding and tepid sales of previously owned homes last month in suggesting that housing would subtract from gross domestic product in the second quarter after being neutral in the January-March quarter.
The inventory bulge and increased costs because of President Donald Trump's tariffs on imported materials including lumber, steel and aluminum, are constraining builders' ability to break ground on new housing projects. Builders have been offering incentives, including price cuts, to attract buyers.
"While builder incentives may prevent a steep decline in new home sales, we see no real upside for sales in the months ahead given our forecast for mortgage rates to remain elevated and the labor market to soften," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.
New home sales dropped 13.7% to a seasonally adjusted annualized rate of 623,000 units last month, a seven-month low, the Commerce Department's Census Bureau said. The decrease was the biggest since June 2022.
April's sales pace was revised down to a rate of 722,000 units from the previously reported 743,000 units.
Economists polled by Reuters had forecast new home sales, which make up about 13.4% of U.S. home sales, declining to a rate of 693,000 units. New home sales, which are counted at the signing of a contract, are volatile on a month-to-month basis and subject to big revisions.
They decreased 6.3% on a year-on-year basis in May. The decline in sales was mostly among completed homes.
"This trend is likely to continue as builders sell through current inventory," said Veronica Clark, an economist at Citigroup. "Sales of homes where construction has not yet started remain very low, indicating little future support for housing construction."
Sales last month tumbled 21.0% in the densely populated South. They declined 5.4% in the West and fell 7.1% in the Midwest. But sales soared 32.1% in the Northeast.
HIGHER BORROWING COSTS
Mortgage rates have remained elevated in tandem with U.S. Treasury yields amid heightened economic uncertainty stemming from the import duties, which have prompted the Federal Reserve to pause its interest rate cutting cycle. Fed Chair Jerome Powell told lawmakers on Tuesday that the sweeping tariffs could begin raising inflation this summer and reiterated that the U.S. central bank was in no rush to resume rate cuts.
Stocks on Wall Street were higher as tensions in the Middle East eased. The dollar gained versus a basket of currencies. Yields on longer-dated U.S. Treasuries rose slightly.
The Fed last week left its benchmark overnight interest rate in the 4.25%-4.50% range where it has been since December.
The average rate on the popular 30-year fixed mortgage hovered just under 7% in May, data from mortgage finance agency Freddie Mac showed. Government data last week showed permits for future construction of single-family housing dropped to a two-year low in May as builders struggled with the inventory overhang and higher costs from duties on materials, including lumber, steel and aluminum
A National Association of Home Builders survey last week also showed sentiment among single-family homebuilders plummeted to a 2-1/2-year low in June. The NAHB reported a rise in the share of builders cutting prices to reduce the inventory bulge, and forecast a drop in single-family housing starts this year.
Economists expect residential investment, which includes homebuilding and sales, to have contracted in the second quarter after a slight decline in the January-March quarter.
The inventory of unsold homes on the market increased to 507,000 units, the highest level since October 2007, from 500,000 in April. The supply of completed homes for sale was the highest since July 2009.
At May's sales pace it would take 9.8 months to clear the supply of new houses on the market, the highest since September 2022 and up from 8.3 months in April. The inventory bloat helped to slow new house price inflation. The median new house price increased 3.0% to $426,600 in May from a year earlier.
"Historically, completed new home inventories have amounted to around 1.6 months' supply," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "In May, the figure was 2.3 months, the highest since 2011. I expect residential building activity to be soft in the current quarter and likely in the summer as well."
Reporting by Lucia Mutikani, Editing by Franklin Paul and Andrea Ricci
Source: Reuters