Sales of previously occupied U.S. homes declined in May for the third consecutive month as increasing mortgage rates and record-high prices deterred many potential homebuyers during the peak period of the housing market.
Last month, existing home sales dropped by 0.7% from April to a seasonally adjusted annual rate of 4.11 million, as reported by the National Association of Realtors on Friday.
Compared to May of the previous year, sales also saw a 2.8% decrease. However, the latest figures exceeded economists’ expectations of a pace of 4.07 million, according to FactSet.
“I was anticipating a rebound this spring, but unfortunately, we are not witnessing it,” stated Lawrence Yun, the chief economist at NAR.
Despite the decline in sales, home prices continued to rise for the 11th consecutive month compared to the previous year. The national median sales price reached a record high of $419,300, marking a 5.8% increase from a year ago and a 51% surge from five years prior.
Even with slowing sales, home prices experienced an ascent while the supply of properties on the market reached its highest level in four years.
“It’s somewhat of an anomaly,” remarked Yun. “We are observing low home sales, record-high prices, and properties still receiving multiple offers.”
The U.S. housing market has been grappling with a downturn since 2022 when mortgage rates began to rise from pandemic-induced lows. Last year, existing home sales plummeted to nearly a 30-year low as the average rate on a 30-year mortgage surged to 7.79%, a 23-year high, according to Freddie Mac.
This year, the average rate on a 30-year mortgage has mostly hovered around 7% due to robust economic and inflation reports, prompting the Federal Reserve to maintain its highest short-term rate in over two decades.
Following recent statements by Federal Reserve officials regarding inflation nearing their 2% target level, expectations for interest rate cuts have heightened. The delayed Fed policy changes could be contributing to the deferred recovery in home sales, according to Yun.
High mortgage rates are deterring homeowners with fixed-rate mortgages below 3% or 4% from selling their homes now, a phenomenon known as the “lock-in” effect.
Last year, over half of mortgaged homes had rates below 4%, with 87% below 6%, as per Realtor.com.
Another factor constraining the housing market is the limited availability of homes for sale, although this has improved slightly this year as homes take longer to sell.
At the end of last month, there were about 1.3 million unsold homes, marking a 6.7% increase from April and an 18.5% rise from the previous year, resulting in a 3.7-month supply at the current sales pace compared to the balanced market range of 4-5 months.
“We need to observe if this leads to increased home sales,” Yun remarked. “So far, that hasn’t been the case, but at least inventory is starting to loosen up.”
Despite the rise in available homes for sale this spring, sellers retain the upper hand over buyers.
In May, homebuyers typically purchased homes within 24 days of them being listed, with 30% of properties selling above their initial list price, indicating multiple offers from buyers.
First-time homebuyers lacking home equity for down payments are still facing challenges entering the housing market, accounting for 31% of sales last month and 40% historically.
Cash buyers constituted 28% of sales in May, up from 25% the previous year, while individual investors buying second homes increased to 16% from 15%, as per NAR.
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