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

Existing home sales saw a notable increase of 3.2% in May, reaching an annual rate of 4.170 million units.

This figure exceeded the consensus expectation of 4.070 million and represents the fastest pace of sales this year. Compared to a year ago, sales were up by 3.2%.

The rise in sales was broadly distributed across the country, with increases observed in the Midwest, South, and Northeast regions. The West, however, saw no change in sales activity. The overall gain in May was primarily driven by single-family homes, as sales of condos and co-ops remained flat. Concurrently, the median price of an existing home climbed to $429,300 in May, marking a 1.3% increase from the prior year, though this figure is not seasonally adjusted.

Despite May's encouraging performance, the overall level of activity in 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 aftermath of the Great Financial Crisis and significantly below the pre-COVID pace of roughly 5.250 million units. A key factor constraining the market is affordability, which has worsened recently. Geopolitical events have contributed to higher energy costs and upward pressure on short-term inflation. This environment has pushed 30-year mortgage rates up by 50 basis points since February, now sitting around 6.6%. The persistent inflation also suggests that further monetary easing from the Federal Reserve is unlikely in the near term, with futures markets now anticipating a quarter-point rate hike later in the year. However, some analysts believe the inflationary impact of the recent conflict could be temporary, potentially leading to lower inflation and interest rates once the situation stabilizes.

Buyers also continue to face challenges from constrained 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 all available properties 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 existing homeowners are reluctant to sell due to the "mortgage lock-in" phenomenon, having secured much lower interest rates prior to 2022. This limits options for potential buyers. Furthermore, existing homes face competition from the new home market, where developers are often able to offer mortgage rate buy-downs to attract buyers and move inventory. Despite these headwinds, the relatively modest 1.3% year-over-year increase in the median home price is a positive development for buyers. For the first time since 2023, aggregate wage growth (combining hourly earnings and hours worked) has consistently outpaced median home price gains, which should gradually improve affordability. While the May report offered a welcome sign of activity, these conflicting forces are expected to keep the market constrained in the near term.

Key terms:

1. **Existing Home Sales**: Refers to completed transactions for residential properties that have previously been owned and occupied, excluding new construction.

2. **Median Price**: The midpoint price of all homes sold during a given period, meaning half of the homes sold for more and half sold for less.

3. **Months' Supply**: An economic metric that indicates how long it would take for all currently available homes on the market to be sold given the current rate of sales, assuming no new homes are added.