Sales of new homes increased in May from April, a sign that a lack of supply of houses for sale has driven buyers to seek out newly constructed units, a bright spot for the housing market.
New home sales in May rose 12.2% last month to a seasonally adjusted annual rate of 763,000, according to a report Tuesday from the Census Bureau. The reading comes despite persistently high mortgage rates. Sales were 20% higher than in May 2022.
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Mortgage rates are much higher now than they were a year ago because of the Federal Reserve hiking rates consistently since March 2022. Mortgage rates to lock in the purchase of a new or existing home are now about double what they were right before the Fed started raising rates — making homes more unaffordable to consumers.
The median sales price for a new home was $416,300 in May, a decrease from the month before.
Sales are down by a huge margin from the massive peaks notched in 2020 when the Fed slashed its interest rate target to near-zero. The housing market is in what most economists characterize as a recession, although other recent reports have been a bit more positive than earlier this year.
Because mortgage rates have surged so much, owners of existing homes who have mortgages with rates locked in before 2022 are shying away from selling because they want to keep their historically low rates. That means less existing home inventory on the market, making new homes more of a hot commodity.
The lack of supply has also lifted home construction. Last week it was revealed that the number of multifamily units under construction hit a record in May — 994,000. That surge in supply should help lower rent pressures for families across the country.
Multifamily starts were up 33.2% year over year in May, according to the Census Bureau. The total number of housing starts unexpectedly grew in May, growing by the most since 2016 in a surprise reading for economists.
The number of new private housing units under construction ballooned 21.7% over the past month. Starts are now running at a 1.63 million annual rate, adjusted for seasonal variation. From May 2022 to last month, starts ticked up by 5.7%.
There are other signs the housing market is highly favorable for new construction. Last week, the National Association of Home Builders announced that its builder confidence index rose five points to 55, the first time it was in positive territory in nearly a year.
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“Builders are feeling cautiously optimistic about market conditions given low levels of existing home inventory and ongoing gradual improvements for supply chains,” said NAHB Chairwoman Alicia Huey, a custom homebuilder and developer from Alabama.
In another bit of positive news, at least temporarily, for homebuyers, the Fed paused its rate-hiking this month for the first time in over a year. The central bank’s key overnight rate target will remain at 5% to 5.25%. Rates are still the highest they have been since 2007, at the outset of the global financial crisis, but the pause avoids mortgage rates creeping even higher.
