New Home Sales Jump in May

New home sales jumped 6.7% in May to a 689,000 annualized pace, the strongest since November of last year. Nearly all of that increase was due to sales in the South, the largest market for builders. Both supplies and sales of new and existing homes are trailing results from one year ago. Tight inventories, especially for entry-level properties, rising interest rates and escalating home prices have all contributed to the weakness.

The median price of a new home was $313,000, down 3.2% from a year ago. The drop in price was mostly due to the regional composition of gains - heavily in the less-expensive South - not weakness in demand. In fact, the National Association of Home Builders complains that rising materials costs, include lumber tariffs, have added $9,000 on average to the cost of building a new home. Confidence among builders deteriorated a bit in June as they continue to struggle to move downscale to build more affordable homes for first-time buyers in an escalating cost environment. Labor is almost nonexistent in some markets so wages are finally picking up for construction workers.

Mortgage behemoths Fannie Mae and Freddie Mac have tried to help by lowering the down payment required for first-time buyers. Income limits on loans with low down payments have also been lifted. In a market without much supply, there is a real risk that those shifts do more to bolster prices than ownership rates.

Bottom Line
Any gain in home sales, given the pent-up demand still in the market, is welcome news. There are real concerns, however, that tight inventories and lack of entry-level products will push up home prices too rapidly. The recent slump in total sales from one year ago is worrisome because the housing market tends to be the first sector to peak before a recession. The good news is that sales can peak well over a year before a recession hits.

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