Sales of previously owned homes in the U.S. saw a slight increase in May. However, the housing market continues to be constrained by persistently high mortgage rates and rising home prices, making affordability a significant hurdle for potential buyers despite a growing inventory of properties.
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The modest rise in sales indicates a market struggling to gain momentum. Key takeaways include a small monthly sales increase, a year-over-year decline, soaring median home prices reaching a new May high, and improved inventory levels that are still below pre-pandemic norms.
Decoding May’s Sales Numbers
According to the National Association of Realtors (NAR), existing home sales rose by 0.8% in May compared to April. This brought sales to a seasonally adjusted annual rate of 4.03 million units. This figure slightly exceeded the 3.95 million pace economists surveyed by FactSet had anticipated.
Despite the monthly uptick, sales were down 0.7% when compared to May of the previous year. This highlights the ongoing weakness in the market compared to past performance.
The Stubborn Reality of High Prices and Rates
Affordability remains the primary challenge in the U.S. housing market. While the pace of growth has slowed, home prices have continued their upward trajectory, marking the 23rd consecutive month of annual increases.
The national median sales price reached $422,800 in May, climbing 1.3% from a year earlier. This represents an all-time high for the month of May, underscoring the persistent issue of rising costs for homebuyers.
The U.S. housing market has been in a downturn since early 2022, coinciding with the rise in mortgage rates from historical lows seen during the pandemic. Last year, home sales reached their lowest level in nearly three decades.
Mortgage rates have remained elevated. The average rate on a 30-year fixed mortgage has stayed near its high for the year, hovering around 7%. While there was a brief dip earlier in the year, rates quickly rebounded, significantly impacting buyer purchasing power.
Homes purchased in May typically went under contract in the preceding weeks when the average 30-year mortgage rate fluctuated between 6.62% and 6.89%. These rates add considerable cost to monthly payments compared to just a few years ago.
A 'For Sale' sign stands in front of a suburban house on a sunny day, symbolizing the US housing market
The Affordability Gap Widens
Years of significant home price appreciation, coupled with high mortgage rates, have pushed homeownership out of reach for many. The median U.S. home sales price has surged 52% since May 2019. In contrast, the median U.S. annual income has increased by only 30% over the same period, according to NAR’s chief economist, Lawrence Yun.
This widening gap means prospective buyers need substantially higher incomes to qualify for a mortgage. Realtor.com data indicates that in May, an annual income of $91,960 was required to afford a typical home with a 20% down payment. This is nearly 87% higher than the income needed in May 2019.
Inventory Sees Improvement
One positive development for homebuyers is the increase in available properties. At the end of May, there were 1.54 million unsold homes on the market. This marks a 6.2% increase from April and a significant 20.3% rise compared to May last year.
While this represents a welcome expansion of choices for buyers, the current inventory is still considerably lower than the roughly 2 million homes typically available before the pandemic disrupted the market.
May’s inventory translates to a 4.6-month supply at the current sales pace. This is an improvement from 4.4 months in April and 3.8 months in May last year. A balanced market is traditionally considered to have a 5- to 6-month supply, suggesting the market is slowly moving towards better balance, though still favoring sellers in many areas due to overall low inventory levels.
What’s Next for the Housing Market?
The May data reinforces the picture of a housing market caught between conflicting forces: improving inventory and steady demand offset by significant affordability constraints imposed by high prices and mortgage rates. The slight increase in sales could indicate a modest thawing, possibly from buyers adapting or finding specific opportunities.
However, without a notable reduction in either home prices or mortgage rates, affordability will likely continue to cap sales growth. Potential shifts in Federal Reserve policy regarding interest rates will be a key factor to watch, as they could influence mortgage rates and impact market activity moving forward.
