New-home sales fall in May as inventory piles up

Homebuilders with unsold inventory are feeling the pinch of high mortgage rates — and it’s showing up in new-home sales data.

The U.S. Census Bureau’s new-home sales report for May shows that transactions took a nosedive to a seasonally adjusted annual sales volume of 619,000. Despite May being part of the prime homebuying season, that number represented a 16.5% year-over-year drop and was 11.3% below the revised rate in April.

Supply has been steadily increasing and stood at 9.3 months at the current sales rate in May. It was at 8.1 months in April and 6.9 months one year ago. According to Bright MLS, the 481,000 new homes on the market is the most since January 2008, when homebuilders pulled back on production before the financial crisis.

This inventory pileup could start to affect new-home prices. The current median price is $417,400, but in March and April, it was above $433,000, a roughly 3% drop.

“However, while new home inventory is back at 2008 levels, other fundamentals in the market are significantly different than they were 16 years ago,” Bright MLS chief economist Lisa Sturtevant said in a statement. “The job market is strong, there is still pent-up demand among Millennials, and for all the increase in inventory, overall supply is still below pre-pandemic levels.” 

The new-home sales numbers contrast substantially with the existing-home sales report for May from the National Association of Realtors (NAR). Sales volume in that segment of the market dropped 2.8% compared to last year and by only 0.7% month over month.

That’s because relative to homebuilders, homeowners have more options for offering concessions, such as help with closing costs and repairs. Mortgage rates that continue to hover around 7% appear to be canceling out builder concessions, according to First American deputy chief economist Odeta Kushi.

Geographically, the rise in inventory isn’t in areas with the most job opportunities, such as Seattle, Boston or New York City.

“These areas also tend to have households with higher levels of home equity and, therefore, less likely to sell in the current higher-for-longer interest rate environment,” CoreLogic chief economist Selma Hepp said in a statement. “The mixed economy may drive the Fed to cut rates, sooner than later, as middle and low-income households continue to struggle.”

HousingWire Lead Analyst Logan Mohtashami added some key context to the report. The general trend line shows steady growth for new-home sales since the low points of 2022, and the past three months had positive upward revisions. In addition, purchase mortgage application numbers are growing and the number of new homes being completed are now above pre-pandemic levels.