US new home sales rebounded in May. Consumer sentiment at record low

Carpenters work on new homes still under construction as demand for building materials increases in Tampa, Florida, US, May 5, 2021. REUTERS/Octavio Jones/File Photo

WASHINGTON (Reuters) – Sales of new U.S. single-family homes rose unexpectedly in May, but the recovery is likely to be temporary as home prices and the average contract rate continue to approach a 30-year flat rate mortgage. 6%, reduce affordability.

While the report from the Commerce Department on Friday also showed that the supply of new homes reached a 14-year high last month, the overall housing stock is still notably low. The surge in sales after four consecutive monthly declines likely reflects buyers’ rush to hold mortgage rates in anticipation of further increases. This month’s survey suggested that homebuilders had expected weaker sales in June.

“We think surprisingly strong new home sales in May will prove to be the last hurry for new home sales this year,” said Mark Fettner, chief economist at Wells Fargo in Charlotte, North Carolina.

New home sales jumped 10.7% to the seasonally adjusted annual rate of 696,000 units last month. April sales pace was revised up to 629,000 units from 591,000 units previously reported. Sales rose in the populous West and South, but declined in the Midwest and Northeast.

Economists polled by Reuters had expected new home sales, which account for 11.4% of US home sales, to fall to a rate of 588,000 units. Sales fell 5.9% year over year in May. It peaked at 993,000 units in January 2021, the highest level since the end of 2006.

The average contract rate on a 30-year mortgage rose this week to more than a 13-1/2-year high of 5.81%, from 5.78% last week, according to data from mortgage finance agency Freddie Mac. The rate has risen more than 250 basis points since January, amid a rise in inflation expectations and a spike in interest rates from the Federal Reserve.

However, there was some encouraging news on the inflation front. While a University of Michigan survey on Friday confirmed that consumer confidence fell to a record low in June, consumer inflation expectations were slightly moderate.

The University of Michigan said its final consumer confidence index fell to 50.0 from a preliminary reading of 50.2 earlier this month. It fell from 55.2 in May.

One-year inflation expectations remained unchanged from May at 5.3%, but down from June’s preliminary reading of 5.4%. Five-year inflation expectations rose to 3.1% from 3.0% in May, but are down from 3.3% earlier in June.

An increase in initial inflation expectations and a jump in annual consumer prices was behind the Federal Reserve’s decision last week to raise its policy rate by three-quarters of a percentage point, its largest rise since 1994. Read more

“Fed officials will breathe a sigh of relief,” said Christopher Robke, chief economist at FWDBONDS in New York. “There is nothing in today’s data to change market expectations for another 75 basis point rate hike in July.”

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. US Treasury yields rose.

Residential Cooling

This week’s data showed sales of previously owned homes fell to a two-year low in May. Homebuildings and building permits also fell last month, although they remained at high levels. But lower demand can help realign supply and demand for housing and slow price growth. Read more

The median new home price in May accelerated 15.0% from a year ago to $449,000. There were 444,000 new homes on the market at the end of last month, the highest number since May 2008 and up from 437,000 units in April.

Homes under construction accounted for approximately 65.8% of the inventory, with homes yet to be built accounting for approximately 25.9%. At the pace of May sales, it will take 7.7 months to clear the supply of homes on the market, down from 8.3 months in April.

“Going forward, we expect homebuilders to be willing to offer more incentives and discounts to support sales in an environment of rising mortgage rates,” said Doug Duncan, chief economist at home mortgage agency Fannie Mae.

(Lucia Mutikani reporting, additional reporting by Lindsey Dunsmeyer); Editing by Mark Porter and Paul Simao

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