U.S. Existing Home Sales Rose 3.2% in May, Beating Expectations

Existing home sales in the U.S. increased by 3.2% in May, reaching a seasonally adjusted annual rate of 4.170 million units. This figure exceeded the consensus estimate of 4.070 million and represents the fastest pace of sales seen this year. On a year-over-year basis, sales were up 3.2%.

The rise in sales was broadly distributed across several regions, with gains observed in the Midwest, South, and Northeast. However, sales in the West remained unchanged. The increase was driven entirely by single-family homes, as sales of condominiums and co-ops held steady during the month. The median price for an existing home rose to $429,300 in May, marking a 1.3% increase compared to the previous year.

Despite May's better-than-expected performance, the overall housing market continues to face significant headwinds. Sales have hovered around a 4.000 million annual pace for the past three years, a level comparable to the period following the Great Financial Crisis and considerably below the 5.250 million pace observed pre-COVID, and the 6.500 million pace during the pandemic. A primary concern remains housing affordability, which has deteriorated recently due to rising energy costs linked to geopolitical events, contributing to upward pressure on short-term inflation. This environment has pushed 30-year mortgage rates up by 50 basis points since February, now hovering around 6.6%. The persistent inflationary pressures have also led market participants to price in a potential quarter-point rate hike by the Federal Reserve later this year, removing prospects of near-term easing.

Another constant challenge for buyers is the tight inventory of available homes. While existing home inventory is at its highest level since the pandemic, the months' supply of homes—a measure of how long it would take to sell all available inventory at the current sales pace—stood at 4.5 in May. This is still below the 5.0 benchmark that the National Association of Realtors considers indicative of a normal market. Many current homeowners are reluctant to sell due to a "mortgage lock-in" phenomenon, having secured much lower interest rates prior to 2022. This limits options for potential buyers, who also face competition from the new home market, where builders are often offering incentives like mortgage rate buydowns to attract purchasers.

Despite these challenges, there is some positive news for prospective buyers: aggregate wage growth, a combination of hourly earnings and hours worked, has been consistently outstripping median home price gains over the past year, a trend not seen since 2023. This dynamic is slowly helping to improve affordability. While May's report offers a glimmer of optimism, these conflicting market forces are expected to keep housing activity constrained in the near term.

Key terms:

1. **Seasonally Adjusted Annual Rate**: An economic indicator that accounts for typical seasonal variations in data, presenting it as if it occurred consistently over a full year to allow for better comparison of underlying trends.

2. **Median Price**: The midpoint in a list of prices, where half of the homes sold for more and half sold for less. It is less affected by extremely high or low prices than an average price.

3. **Months' Supply of Homes**: A measure of how many months it would take for all the currently available homes on the market to sell, given the current sales pace. A higher number indicates more supply relative to demand, and vice-versa.