New home sales rose less than expected in the United States last month, following a slump in April, according to data released today by the Census Bureau.
Sales of new single-family homes in May were 10.7 percentage points higher than April’s revised total of 629,000, when new home sales plunged 16.6% month-on-month to their most low level since April 2020, as costs continued to rise for both homebuilders. and potential buyers.
May new home sales were still 5.9% lower than the May 2021 estimate of 740,000.
Why are new home sales stagnating?
First-time buyers are being squeezed out of the market, as the combination of soaring mortgage rates, limited inventory on hand, soaring inflation and record house prices – 34% higher today than it two years ago – hit them hard.
Buying a home just isn’t affordable for a lot of people right now.
Mortgage rates are at their highest level since 2008, after the 30-year average rate rose from 3.1% to 6.28% on June 14.
The Federal Reserve’s increases to its key interest rate amid soaring consumer prices are making borrowing much more expensive, adding pressure to housing costs and further slowing spending.
Home prices are also putting many homes out of reach for buyers. The median selling price for new homes sold in May 2022 was $449,000. The average sale price during the same month was $511,400.
The global cost of living crisis is also deeply affecting consumers’ wallets, further hampering their chances of buying new homes.
Will there be a real estate crash?
As demand wanes, the housing market could slow significantly, leading some analysts and observers to talk of a bubble bursting or even a stock market crash.
Mark Zandi, chief economist at Moody’s Analytics, told a bipartisan housing policy summit in Washington, DC this week that he expects a nationwide correction from “coast to coast.”
In recent years, homebuyers have flocked to the market, lured by attractive home loan rates during the pandemic. Prices soared as buyers fought over a limited number of homes for sale as the market and new home construction took a long time to recover from the global financial crisis.
Homebuilders, who are managing rising construction costs and a continued decline in buyer demand, are increasingly less confident about the advisability of building new homes, a factor that could contribute to a new lack of offer on the market.
A crash would be the worst-case scenario that could emerge from the current situation, and many economists doubt that the housing market is ready for a crash similar to that of 2008. The sector is much safer now than it was there. at 14. , while applicants could still get “no-doc loans” and were much more likely to default.
Nicole Bachaud, an economist at Zillow, told Forbes that “lending standards have become stricter and credit scores for new mortgages are much higher on average now than they were in the early 2000s. “.
“What is much more likely is a gradual slowing in the pace of price appreciation where house prices continue to grow, but not as fast as they are now,” Bachaud added.
Homeowners and lenders are also in a much stronger position now than they were then, with higher home prices and better levels of home equity. The two are unlikely to panic over the current downturn.
Another potential outcome would be for the housing market to “correct” more smoothly, adjusting to falling demand as house prices cool. This would allow first-time buyers — the largest group of people buying homes, now mostly millennials — to start buying homes again.
Doug Duncan, Fannie Mae’s chief economist, said in a statement: “Mortgage rates have risen dramatically in recent months, and historically such large moves have ended in a housing downturn.”
Jacob Channel, senior economist at Lending Tree, told the New York Post that soaring interest rates have already led to a cooling of the fiery housing market over the past two years.
“This current ‘correction’ is neither unexpected nor necessarily a bad thing – especially as it will give some buyers a bit more leeway when looking for accommodation,” Channel said.