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Housing Market Drags on Growth

RFP
New home sales fell to the lowest level in a year in May as April sales were revised lower. New single-family home sales fell to 769,000 units; over one third of those sales included homes not yet constructed. Severe shortages, including lumber and labor, combined with zoning restrictions have boosted home prices while creating long backlogs for builders who cannot get hold of the materials.

The South, the largest housing market in the country, reported a 14.5% drop in sales in May; all other regions were flat or experienced some growth in sales but not enough to offset the drop in the South. Vacation homes remain in strong demand, reflecting buying activity by the highest earning households. Record heat and wildfire risk could slow building activity overall during the next few months.

The number of new homes available for sale at the end of May rose 4.8%, reaching the highest level since July 2019 at just above the five-month mark. A six-month supply is usually needed to clear the market. That will help to alleviate pricing pressures but inventory levels remain low. More entry-level inventory is needed to help first-time buyers and low-income renters to buy homes.

Existing home sales (recorded at the contract closing, so they lag new home sales data) fell to 5.8 million in May. Sales have fallen for four months in a row, coming off of a peak hit during the last quarter of 2020. Bidding wars caused by the lack of available homes for sale have pushed prices to record highs. The market is even tighter for entry-level properties. The largest annual sales growth is concentrated in houses priced at $750,000 and up. Nine out of ten homes sold in May were sold in less than a month. Inventory sits at two and a half months’ supply, up from April but still 21% below a year ago.

Bottom Line
Residential investment became a drag on the economy in the second quarter, ending three consecutive quarters of growth. Attitudes about home buying have soured in response to the rapid rise in prices and constraints on supply. Listings by older homeowners should pick up over the summer months, but not enough to alleviate the inventory constraints. Those constraints will limit the impact the housing market has on the overall economy in the second half of the year, even as sellers hold the upper hand over buyers. The urgency to buy is also expected to abate as more offices and schools reopen in the fall.

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