U.S. New Home Sales Plunge 7.3% in May, Hitting Near Two-Year Low

New single-family home sales in the U.S. experienced a significant downturn in May, falling 7.3% to a seasonally adjusted annual rate of 580,000 units. This figure came in substantially below the consensus forecast of 640,000, marking one of the slowest paces of activity since 2022 and approaching pre-pandemic levels, which have proved to be a persistent ceiling for sales in recent years. On a year-over-year basis, sales are down 6.8%.

The decline in May was primarily driven by substantial drops in the West and South, while sales managed to increase in the Midwest and Northeast regions. This broad weakness pushed the months' supply of new homes — a key indicator of market inventory — to 10.3 months. The increase in inventory was a dual effect of both slower sales activity and an addition of 11,000 units to the market.

Despite the decrease in sales volume, new home prices remained relatively stable year-over-year, with the median price at $424,900 in May. The average price, however, increased 5.0% from a year ago to $540,600. While financing costs have generally risen due to geopolitical events impacting energy prices and inflation, the housing market has seen some relief in terms of affordability. Median sales prices for new homes are down 8% from their peak in October 2022. Additionally, the median square footage for new single-family homes built increased by 3.7% between Q3 2022 and Q1 2026, indicating that buyers are getting more value for their money, not just smaller or less expensive options. This trend suggests developers are offering incentives to move inventory.

Several factors continue to weigh on the housing market, including elevated financing costs. The average 30-year fixed mortgage rate has climbed approximately 45 basis points since the start of a recent international conflict, and further interest rate cuts appear unlikely in the near term. This contrasts with the market for existing homes, which continues to face challenges as current homeowners are reluctant to sell, given their locked-in low fixed-rate mortgages from the pandemic era. However, the availability of more affordable new homes and an abundance of inventory may provide a modest boost to sales later in 2026.

In related economic news, the M2 measure of money supply saw a significant 1.1% jump in May, its largest monthly increase since 2021. Despite this sharp rise, M2 is up 5.6% from a year ago, still below its historical growth rate of about 6%, but warrants close observation. Manufacturing sentiment presented a mixed picture, with the Philadelphia Fed Manufacturing Index improving to +10.3 in June from -0.4 in May, while the Richmond Fed index declined to 4 from 13. On the labor front, initial jobless claims decreased by 4,000 to 226,000, though continuing claims rose by 24,000 to 1.810 million.

Key terms

1. **Months' supply of new homes**: A measure of how long it would take for all the currently available new homes on the market to be sold at the current sales pace. A higher number generally indicates a buyer's market.

2. **Median price**: The middle price point in a set of data, where half of the homes sold for more and half sold for less. It is often considered a more accurate representation of typical home prices than the average price, which can be skewed by extremely high or low sales.

3. **M2 money supply**: A broad measure of the amount of money in circulation, including cash, checking deposits, savings deposits, money market accounts, and other liquid assets. It is used as an indicator of economic growth and potential inflation.