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

Existing home sales in the U.S. increased 3.2% in May, reaching a seasonally adjusted annual rate of 4.170 million units. This figure exceeded the consensus expectation of 4.070 million and represents the strongest sales pace observed this year. Compared to May of the previous year, sales are up 3.2%.

The regional breakdown of sales in May showed gains in the Midwest, South, and Northeast, while the Western region remained unchanged. The overall increase in sales was entirely attributable to single-family homes, with sales of condominiums and co-ops holding steady.

The median price for an existing home rose to $429,300 in May, not seasonally adjusted, marking a 1.3% increase from a year prior. While May's sales performance surpassed forecasts, the overall activity within the existing home market remains subdued. 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 significantly below the pre-COVID pace of approximately 5.250 million units annually, and even further from the 6.500 million pace seen during the pandemic.

A primary factor contributing to the constrained market is affordability. Recent geopolitical events, specifically the Iran War, have led to increased energy costs and upward pressure on short-term inflation. This has resulted in a rapid ascent of 30-year mortgage rates, which have climbed 50 basis points since February and are currently around 6.6%. Elevated inflation also lessens the likelihood of interest rate reductions from the Federal Reserve, with futures markets now pricing in a potential quarter-point rate hike later in the year. However, some anticipate that the inflationary impact of the Iran War may be temporary, given the tight monetary conditions preceding it, suggesting that both inflation and interest rates could decline once the conflict abates.

Buyers also face persistent challenges from limited inventory. While existing-home inventory is currently tied for its highest level since the pandemic, the months' supply of homes – a measure of how long it would take to sell the existing inventory at the current sales pace – was 4.5 in May. This is below the 5.0 benchmark that the National Association of Realtors considers indicative of a normal market. Many current homeowners are hesitant to sell due to a "mortgage lock-in" phenomenon, having secured much lower interest rates prior to 2022. This further restricts the choices available to potential buyers. The existing home market also contends with competition from new home sales, where developers are frequently offering mortgage rate buy-downs to attract buyers and move inventory. On a positive note for buyers, aggregate wage growth (combining hourly earnings and hours worked) has consistently outpaced median home price gains over the past year, improving affordability for the first time since 2023. Despite the welcome sign from May's report, these various market forces are expected to keep activity constrained in the near term.

Key terms:

1. **Existing Home Sales**: Refers to the number of previously constructed homes, condominiums, and co-ops for which contracts closed during a specific month. It is a key indicator of housing market activity.

2. **Median Price**: The price at which half of the homes sold for more and half sold for less. It is a commonly used measure for average home prices as it is less skewed by extreme values than the mean.

3. **Months' Supply of Homes**: An estimate of the time it would take to sell all currently available homes for sale, given the current sales pace. A supply of around 5-6 months is generally considered a balanced market.