New home sales plummeted more than 5% in June from May to a 631,000-unit annualized rate, the slowest pace since last October when a series of storms disrupted sales. The losses occurred in all regions but were led by the West, which squeaked out a marginal gain. That was despite a move downscale in prices by builders. Demand is strongest among entry-level buyers who are becoming more concerned about affordability. Home prices and mortgage rates have risen while wages have stagnated. Real wage gains in June actually fell from a year earlier.
The silver lining for the housing market is the increase in inventories last month; supply has been tight. The extra inventories will hopefully keep prices down this month and help spur demand. That said, demand dynamics in the housing market appear to be shifting. What was once purely a sellers’ market is starting to yield a little ground to buyers.
We saw a similar pattern in existing home sales, which fell 0.6% to a 5.38 million-unit annualized rate after downward revisions to May. Existing home sales trail new home sales partly because they are not booked until a sale closes. Existing sales are now running more than 2% behind levels one year ago. Inventories of existing homes for sale increased along with prices. Realtors are hoping the small uptick in inventories will bring out more first-time buyers even as mortgage rates rise.
The softening in home sales comes on the heels of a slight weakening in homebuilder confidence this summer. Foot traffic has slackened in recent months but remains above the levels seen a year ago. Builder sentiment is strongest in the West, where inventories of new homes remain the most constrained. Sentiment in the South came back a bit in July; that is the most important market for the overall economy because it is the largest and least developed and accounts for more than half of all housing starts.
We expect to see a surge in growth for the second quarter. The housing market, however, looks like it will be the weakest sector for the economy during the past three months. New inventory coming onto the market could unleash more entry-level demand, but the housing market appears to be encountering some headwinds.
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