New home sales unexpectedly broke a four-month streak of losses and climbed more than economists projected in May, according to data released Friday, but experts note the reprieve may not last long, citing rising mortgage interest rates that are likely to continue curbing demand—likely pulling down record prices as soon as the end of this year.
About 696,000 new single-family houses were sold last month on a seasonally adjusted annual basis, climbing 10.7% above the April rate of 629,000 (which was revised up from 591,000) and far surpassing average analyst projections of 587,000, the Census Department reported on Friday.
“Don’t be deceived,” Pantheon Macro chief economist Ian Shepherdson said in emailed comments after the report, saying the bounce doesn’t change market outlook given an “astonishing collapse” in mortgage applications this year as rapidly climbing mortgage rates—now at the highest level since the Great Recession—stunt demand.
The housing market is “rolling over, rapidly, and sales have further to fall,” Shepherdson said, adding he sees “little chance of a clear bottom” until late summer or early fall—after sales have fallen “substantially” further given the lagging effect of mortgage applications on sales.
In a good sign for potential buyers, lower demand has helped inventory levels—long constrained during the pandemic—skyrocket, Shepherdson notes, predicting prices will fall across the second half of the year as home builders seek to reduce inventory; the pace has already slowed, with prices climbing just 0.8% over the past six months, compared to 2.5% last summer.
In a note to clients Thursday night, Goldman Sachs chief economist Jan Hatzius said current housing market trends, including weakened price growth and elevated vacancy rates, suggest prices will fall by about 3% for every 1-percentage-point increase in mortgage rates, which have already climbed by roughly 3 percentage points over the past year.
Goldman projects home prices, which hit a record high $507,800 last quarter, will peak in the fourth quarter of this year and then edge down until mid-2024.
“The May bounce does not change the big picture at all: Potential home buyers’ purchasing power has been drastically reduced by the surge in mortgage rates, so demand has plunged,” Shepherdson says. “The market is cratering, and prices are under pressure.”
Home prices skyrocketed during the pandemic as interest rates collapsed and an influx of Americans working from home drove up demand. However, the Federal Reserve this year started raising rates to cool decades-high inflation—pushing up the price of home buying by hundreds of dollars each month and pummeling demand as a result. In a sign of potential weakness to come, the number of housing starts, or new houses on which construction started, plunged 14.4% to about 1.5 million last month from 1.8 million in April—sharply below economic projections calling for nearly 1.7 million starts, the Census Bureau reported last week.
With affordability challenges curbing demand, sellers have been slashing asking prices at the highest rate since at least 2015, according to real estate brokerage Redfin. About 6% of listings had price drops in the four weeks ending June 19, Redfin reported Thursday. Prices haven’t declined any significant amount yet,” Redfin chief economist Daryl Fairweather said in a statement, noting about 55% of homes sold above list price. “But if the housing market continues to cool, prices could fall in 2023,” he adds.
What To Watch For
The Fed’s expected to make its next interest rate hikes at the conclusion of its upcoming policy meeting on July 27. Goldman economists said they now expect the Fed will hike rates by 75 basis points again next month—adding to the most aggressive increases in two decades.