U.S. Pending Home Sales Hit All-Time Low in May Amid Decreased Demand

Existing home sales in the United States fell for a third consecutive month in May, as record-high prices and a resurgence in mortgage rates sidelined potential buyers from the market. Sales dropped by 0.7% to a seasonally adjusted annual rate of 4.11 million units, slightly higher than the projected rate of 4.10 million. Home sales also fell 2.8% compared to May last year [25aa68cd].

U.S. pending home sales in May fell to an all-time low, slipping 2.1 percent, with all regions in the country registering reductions year-over-year. The Midwest and South saw monthly losses in transactions, while the Northeast and West recorded gains. The Pending Home Sales Index (PHSI), a forward-looking indicator of home sales based on contract signings, decreased to 70.8 in May, down 6.6% year-over-year [41a09a5d].

The average rate on a 30-year fixed mortgage reached a six-month high of 7.22% in early May before dropping to just below 7.0% by the end of the month [6ddba693] [51705bb9] [618c7b64]. The elevated mortgage rates are keeping many homeowners from selling as they don't want to give up their fixed-rate mortgages. First-time homebuyers continue to struggle to enter the housing market, accounting for 31% of all homes sold in May [25aa68cd].

Despite the decline in sales, there was an increase in housing inventory, which rose by 6.7% to 1.28 million units, the highest level since August 2022 [6ddba693] [51705bb9] [618c7b64]. The inventory of unsold homes increased by 6.7% from April and 18.5% from May last year. The current supply translates to a 3.7-month supply, while a balanced market typically has a four- to five-month supply [25aa68cd].

The median price of existing homes surged by 5.8% from the previous year to a record high of $419,300. Home prices continue to rise despite the slowdown in sales. The U.S. housing market has been slumping since 2022 due to rising mortgage rates. The Federal Reserve's delay in cutting interest rates may be contributing to the delayed recovery in home sales [25aa68cd].

NAR Chief Economist Lawrence Yun predicts that rising inventory and lower demand will lead to easing home price appreciation in the coming months. NAR forecasts that existing-home sales will rise to 4.26 million in 2024 and 4.92 million in 2025, while housing starts are expected to rise to 1.382 million in 2024 and 1.492 million in 2025. The association also anticipates an increase in the median existing-home price to $405,300 in 2024 and $412,000 in 2025 [41a09a5d].

The surge in mortgage rates earlier in May, with the average rate on a 30-year fixed mortgage reaching a six-month high of 7.22%, has contributed to the challenges in the housing market. However, rates dropped to just below 7.0% by the end of the month [6ddba693] [51705bb9] [618c7b64]. The Federal Reserve is expected to begin paring back interest rates later this year, which could bring down mortgage rates [6ddba693] [8ee6015f].

Despite the challenges in the housing market, a recent S&P survey suggests a potential boost for the US economy and the Fed's policies, with expansion in June set to hit a 2-year high and employment surging [6ddba693] [43a54a26].

Home prices in the US rose 6.3% over the year in April, according to the S&P CoreLogic Case-Shiller Home Price Index. This increase, although slower than the previous month, lifted the index to a fresh all-time high. The growth in home prices is attributed to solid demand for housing, a chronic housing shortage, and the mortgage rate lock-in effect. High mortgage rates have made monthly payments unaffordable for many buyers, discouraging sellers from putting their homes on the market. The current mortgage rates offered are around 6.87%, compared to rates as low as 2.65% in the past [03dab9d8].

Sales of newly built homes in the US fell 11.3% in May from the prior month, to 619,000, marking the steepest monthly decline since September 2022 and the lowest level since November. Mortgage rates soared to the highest level of the year in early May and have since trended down. High interest rates and expectations that they'll remain elevated for longer than expected are weighing on America's homebuilders. US homebuilder sentiment soured in May for the second month in a row. Housing starts fell 5.5% last month to a seasonally adjusted annual rate of 1.28 million units, the lowest level since 2020. Building permits dipped 3.8%. NAHB chairman Carl Harris said that persistently high mortgage rates are keeping many prospective buyers on the sidelines and home builders are also dealing with higher rates for construction and development loans, chronic labor shortages, and a dearth of buildable lots [b78010b6].

Top real estate experts predict that home prices in the US are unlikely to fall anytime soon due to high demand and low supply. The median price of a resale home reached an all-time high of $419,300 in May, and with the 30-year mortgage rate averaging 6.87%, affordability is a growing challenge. However, experts believe that home prices will not experience significant declines unless there is a major economic shock. The US is currently facing a housing shortage of 4.5 million units, which limits the potential for price decreases. While home prices may flatten or fall in some markets, homeowners should expect a prolonged period of unaffordable prices relative to income levels. Mortgage rates are not expected to return to the historically low levels seen during the Great Recession, and the housing market conditions are different this time around [cdc7f172].

Bank of America economists warn that the US housing market will remain 'stuck' until at least 2026. They predict that home prices will continue to rise, the housing shortage will persist, and mortgage rates may not fall significantly. The supply of homes cannot keep up with demand, leading to higher prices. The 'lock-in effect' is a major problem, as homeowners who refinanced or got a mortgage during the pandemic are effectively locked into their properties due to higher mortgage rates and increased home prices. Bank of America expects the lock-in effect to persist for another six to eight years. The forecast for a 'stuck' housing market has both positive and negative implications, as existing homeowners benefit from higher home prices, while potential buyers are unable to afford homes. The longer potential buyers are prevented from buying, the more they miss out on wealth creation. Bank of America economists suggest that if the US economy achieves a soft landing, home prices could rise even more than anticipated, but a recession would lead to lower prices and improved affordability [d1f70dae].

High interest rates have caused home prices to rise instead of fall. The value of homes has reached a record $419,300 in May, up from $270,000 before the pandemic. Ultracheap mortgages secured when interest rates were low have kept homeowners in their homes, creating a 'lock-in' effect. Two-thirds of outstanding U.S. mortgages have a rate below 4%, but homeowners would have to pay close to 7% for a new mortgage if they were to move. This has led to a frozen housing market and unexpected consequences for the economy [39866ed3].