Real Estate

New home sales sank 7.8% in May, despite a big drop in mortgage rates

Key Points
  • Sales of newly built homes fell 7.8% in May from April and were 3.7% lower than in May 2018, according to the U.S. Census. This number represents signed contracts, not closings.
  • The average rate on the popular 30-year fixed mortgage started May at 4.29%, according to Mortgage News Daily, and then ended the month at 3.94%, a sizable savings on a monthly payment, especially given higher home prices.
  • "The lower mortgage rates haven't unleashed a new wave of demand," says Buck Horne, homebuilding analyst and senior vice-president at Raymond James.
May single family home sales drop 7.8%, missing expectations
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May single family home sales drop 7.8%, missing expectations

Homebuyers pulled away from the builders in May, even as affordability improved thanks to lower mortgage rates.

Sales of newly built homes fell 7.8% from April were 3.7% lower than in May 2018, according to the U.S. Census. This number represents signed contracts, not closings, so it is a very recent indicator of buyers out shopping during the month.

The decline in sales came even as home shoppers were watching mortgage rates fall. The average rate on the popular 30-year fixed mortgage started May at 4.29%, according to Mortgage News Daily, and then ended the month at 3.94%, a sizable savings on a monthly payment, especially given higher home prices.

"The lower mortgage rates haven't unleashed a new wave of demand," said Buck Horne, homebuilding analyst and senior vice-president at Raymond James.

Horne pointed to rising competition from the increasing supply of existing homes for sale, especially in the markets where builders are most active. Supply of existing homes for sale is up a striking 85% in Las Vegas annually, 52% in Seattle and 21% in Dallas, according to Horne. Supply in Southern California is also up in double digits.

"It's harder for the builders to compete against resale inventory that is priced significantly below where their asking price is now," added Horne.

The median price of a newly built home sold in May was $308,000, down 2.7% annually. Builders are not necessarily lowering base prices, but they are offering more incentives; the drop in median price is likely due to a shift in the mix of homes selling. The share of homes sold in the $200,000 to $299,999 category increased in May. More buyers on the lower end would shift the median down.

"This indicates that builders are responding to strong entry-level demand," said Danielle Hale, chief economist for Realtor.com, who also pointed to larger issues hitting home sales. "This decline in May is likely attributed to recent concerns about tariffs and other events that could slow global economic growth, and may be a sign that the Fed's pledge to doing what is necessary to sustain the expansion may require action as soon as next month."

The nation's largest homebuilder by revenue, Lennar, reported second-quarter earnings Tuesday morning and showed a slight drop in the average selling price. New orders were flat, despite the drop in rates. Its executive chairman, however, expressed optimism.

"The well-documented market pause in the second half of 2018 set the stage for more moderate home price increases and lower interest rates, which stimulated both affordability and demand, leading homebuyers back to the market," said Stuart Miller.

The available supply of newly built homes also rose markedly in May to 6.4 months' worth at the current sales pace. In contrast, the supply of existing homes for sale was at 4.3 months at the end of May. New homes come at a price premium to existing homes, and today's buyers, especially younger millennials, are finding it hard to afford new construction.