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

U.S. existing home sales increased by 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 fastest pace of sales seen this year. On a year-over-year basis, sales are up by 3.2%.

The rise in sales during May was broad-based across several regions, with increases observed in the Midwest, South, and Northeast. Sales in the West remained unchanged. The entirety of this gain was attributed to single-family homes, as sales of condominiums and co-ops held steady. Concurrently, the median price of an existing home rose to $429,300 in May, marking a 1.3% increase from a year ago.

Despite May's encouraging sales figures, overall activity in the housing market remains subdued. For the past three years, sales have hovered around a 4.000 million annual pace, a level comparable to the period following the Great Financial Crisis and significantly below the pre-COVID average of approximately 5.250 million units. A key factor constraining the market is affordability, which has recently deteriorated due to escalating energy costs—attributed to geopolitical events—contributing to upward pressure on short-term inflation.

This inflationary environment has led to a rapid increase in 30-year mortgage rates, which have climbed 50 basis points since February to approximately 6.6%. The bond futures market is now pricing in a potential quarter-point rate hike by the Federal Reserve later this year, indicating a diminished likelihood of monetary easing. However, some analyses suggest that the inflationary impact of recent global conflicts may be temporary, potentially leading to lower inflation and interest rates once the situation stabilizes. Tight inventories continue to pose a headwind for buyers, although the supply of existing homes is currently at its highest level since the pandemic.

However, the months' supply of homes—a measure of how long it would take to sell the current inventory at the prevailing sales pace—stood at 4.5 in May. This is below the 5.0 benchmark that the National Association of Realtors considers indicative of a normal market. Many existing homeowners are reluctant to sell due to a "mortgage lock-in" phenomenon, having secured much lower interest rates before 2022. This limits options for potential buyers. Existing homes also face robust competition from new construction, where developers are often offering incentives like mortgage rate buy-downs to attract buyers. On a more positive note for purchasers, the relatively modest 1.3% year-over-year increase in the median price of existing homes, coupled with aggregate wage growth outpacing home price gains for the first time since 2023, is incrementally improving affordability. While May's report offers a welcome sign, a combination of these competing forces is expected to keep market activity constrained in the near term.

Key terms:

1. **Seasonally adjusted annual rate**: An economic statistic that has been adjusted to remove predictable seasonal variations and then annualized to represent what the total would be if the current rate continued for a full year.

2. **Median price**: The middle price in a sorted list of prices, meaning half of the homes sold for more and half sold for less than this amount.

3. **Months' supply of homes**: A measure of how long it would take for all the currently available homes on the market to sell off at the current rate of sales, assuming no new homes were added. It indicates the balance between supply and demand in the housing market.