It’s not that people don’t want to buy — but near-record low inventory and significant price inflation are contributing to the slowdown.
By Manuel Gutierrez, Contributing Economist to NKBA
Sales of new and existing homes fell in May. New home sales declined by 5.9% to an annual rate of 769,000 units, following a larger 7.8% drop in the previous month. In fact, as can be seen in the top panel of Figure 1, sales of new homes have fallen in three of the first five months of the year. From the post-pandemic peak of 993,000 homes sold in January, sales have plunged by 23%.
The short-term trend in the existing homes market is of even more concern, as sales in this sector have fallen every month this year (bottom panel, Figure 2) except for January, when they rose by a negligible 0.2%. Sales in May were equivalent to a 5.8 million annualized rate, just under 1% below the prior month.
Although the comparison to last year is misleading because home sales had hit their pandemic lows around that time, a comparison to two years ago may be more instructive. Existing home sales in May were 9% higher than in May 2019, when they were running at an annual pace of 5.33 million units.
Existing home sales have fallen every month since January, potentially signaling an end to the housing boom.
For new homes, the comparison is slightly different. This segment was hardest hit in April 2020, as sales fell to 582,000. In the following month, sales had rebounded to 704,000, 9% lower than May 2021.
The critical question is whether the declines so far portend an end to what has been considered a housing boom. The current sales pace for new as well as existing homes is approaching pre-pandemic levels, no doubt partly driven down by near-record low home inventory. Nevertheless, sales trends of the latest five months do not compare favorably to the preceding five-month period, from August through December 2020. New home sales have averaged 858,000 a month so far this year, down 9% from the previous five-month period. Similarly, sales of existing homes are off by 6% over the prior five months.
Despite a recent rise in inventory, sales of both new and existing homes have continued to fall.
For new homes, the inventory for May stands at 330,000 (left panel, Figure 2). That figure has risen every month since October and is currently 16% higher than that month. However, it’s important to note that most of the increase in inventory is the result of builders offering to sell homes that have not been started yet. That includes the opening of new developments or the offer to build housing units once consumers indicate an interest.
The inventory of existing homes has also increased since the beginning of the year. There are 200,000 more of homes for resale than there were at the beginning of the year.
Another critical factor impeding stronger home sales is the rise in home prices. The median prices of new and existing homes are up by double digits, 17% and 18%, respectively.
The median price for new homes was $374,000 in May, while the median for an existing homes is $24,000 lower at $350,000 (Figure 3).
Average or mean prices are usually higher than the median, but the difference for new is much larger. Its mean price is $433,000 — $59,000 more than the median. For existing homes, the difference is smaller, at $24,000 above the median.
The figures at the bottom of the bars in Figure 4 represent the changes by region from last year, which show vast differences for new and existing homes.
Regionally, there are vast differences in house prices in both home categories. The highest prices for new homes are in the Northeast, with a median price of $505,000 in the first quarter of this year (Figure 4). For existing homes, the highest prices are in the West, with a median of $493,000.
The median price of new homes in the Northeast is nearly two-thirds higher (64%) than that of the Midwest, which came in at $307,000.
Since regional home prices for new homes are only available on a quarterly basis, first-quarter data for new and existing homes are shown in Figure 4.
For existing homes, the price differential among regions is even greater. Prices are highest in the West, at $493,000, which is just about double those of the Midwest and more than 75% higher than the South.
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