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Does Declining Home Sales Signal End of COVID-Led Housing Boom?

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Sales of new U.S. single-family homes slipped to a one-year low in May, marking the second-straight monthly decline. Record-high prices have been pushing potential buyers away despite a low borrowing rate environment. So, are pandemic-driven tailwinds gradually fading away for the U.S. housing market?

Homebuilding stocks tumbled yesterday on the heels of the news release, with shares of notable homebuilders like Lennar (LEN - Free Report) , Toll Brothers (TOL - Free Report) , D.R. Horton (DHI - Free Report) , PulteGroup (PHM - Free Report) , and Meritage Homes (MTH - Free Report) falling 1.5%, 1.2%, 1.5%, 1.7%, and 1.8%, respectively. Also, iShares U.S. Home Construction ETF (ITB - Free Report) and SPDR S&P Homebuilders ETF (XHB - Free Report) — which track the homebuilding industry — fell a respective 1% and 0.5%.

Let’s take a look at the May sales numbers for new and existing homes.

Record High Prices: A Major Hurdle

New home sales — a leading housing market indicator based on signed contracts, not closings — dropped 5.9% to a seasonally adjusted annual rate of 769,000 units last month. This marks the lowest level since May 2020. Also, April’s sales pace was revised down to 817,000 units from the previously reported 863,000 units. The May figure also fell shy of analysts’ expectation of 869,000 by 11.5%.

Geographically, the decline was concentrated in the South, where sales plummeted 14.5%. Sales, however, rose 33.3% and 6.7% in the Northeast and West, respectively. Sales were unchanged in the Midwest.

Meanwhile, sales of existing homes — which account for bulk of U.S. home sales — dropped for the fourth straight month in May. Existing home sales dropped 0.9% last month from April to a seasonally adjusted annualized rate of 5.8 million units, according to the National Association of Realtors or NARs. The downside was mainly due to lower contribution from the single-family housing segment, which gained the most last year as many Americans sought more spacious accommodations for home offices and schooling amid the COVID-19 pandemic and opted for migration from cities.

On a year-over-year basis, sales were 44.6% higher for existing homes and 9.2% for new homes. It is to be noted that the housing market was basically shut down for about two months at the start of the pandemic, and then rebounded dramatically last summer and remained resilient in 2020.

In this regard, Realtors chief economist Lawrence Yun said, “Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market.”

The median price of an existing home in May was $350,300, up 23.6% from May 2020. This marks not only the highest median price ever but also the 111 straight month of year-over-year gain since March 2012. Meanwhile, the median price for a new home sold last month was $374,400, up from $372,400 in the prior month.

This accelerating home price makes homes less affordable for first-time homebuyers despite the fact that mortgage rates are under 3%. Notably, first-time buyers accounted for 31% of sales of existing homes in May, down from 34% in May 2020.

Will This Call for an End of Housing Boom?

So, how will the U.S. housing market fare during the spring selling season — March through June — when the lowest mortgage rates are colliding with skyrocketing home prices?

Indeed, a few analysts are skeptical about the prospects of the U.S. housing market as many builders are witnessing lighter buyer traffic in recent weeks, particularly in some hottest housing markets in the South and Mountain West. They also believe that this declining sales trend may continue for a long period as builders are unable to deliver more homes because of expensive lumber. Mortgage applications for home purchases have reduced this spring, which is another sign that many buyers are holding off.

Nevertheless, many analysts are optimistic about continuation of strong hosing momentum this year, courtesy of improvement in the supply side. Total housing inventory for existing homes at the end of May grew 7% from the April level. At the current sales pace, this represents a 2.5-month supply, marginally up from April's 2.4-month supply. Also, there were 330,000 new homes on the market in May, up from 315,000 in April. At May's sales pace, it would take 5.1 months to clear the supply of houses on the market, up from 4.6 months in April.

In sync with this, Yun added, "The market's outlook, however, is encouraging.” He also said, "Supply is expected to improve, which will give buyers more options and help tamp down record-high asking prices for existing homes." A few economists are also hopeful that higher prices will tempt some owners to put their homes on the market.

Indeed, the red-hot housing market is now tough for first-time and lower-income buyers. However, home sales have been strong at the upper end. Sales of homes — which are priced at $100,000-$250,00 — dropped 1.7% from a year ago, while sales of homes — priced $750,000-$1 million — jumped 178%, according to NAR.

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