U.S. Home Sales Surge in May as Affordability Improves

Sales of previously owned U.S. homes reached their highest level since December, marking a significant uptick after a slow commencement to the spring purchasing season. According to the National Association of Realtors (NAR), existing home sales rose by 3.2% in May compared to the previous month. This increase brought the seasonally adjusted annual rate to 4.17 million units. Compared to May of the previous year, sales also increased by 3.2%.

The Midwest, South, and West regions saw an upswing in home sales from a year prior, while sales in the Northeast declined, as reported by NAR. The sales figure exceeded economists’ expectations of approximately 4.07 million, according to FactSet.

Throughout most of 2023, home sales hovered around a 4 million annual pace, which is below the historic average of about 5.2 million. Despite the rising trend of mortgage rates this spring, home sales increased last month, benefiting from lower rates compared to the previous year. Nationally, home prices climbed again, with the median sales price rising 1.3% from the prior year to $429,300—a record high for any May dating back to 1999.

Though home prices have increased annually for 35 consecutive months, price growth is now behind income growth in various regions. With mortgage rates lower than they were the previous year, affordability has improved, boosting the housing market’s momentum, according to Lawrence Yun, chief economist at NAR.

“I cannot definitively say if home sales are truly coming out of the slump, because we know that there’s still uncertainty related to the oil prices or how the mortgage rates will move,” Yun stated. He suggested that sales could recover from their prolonged downturn if the average rate on a 30-year mortgage fell closer to 6%.

The U.S. housing market has been struggling since 2022 due to climbing mortgage rates that followed pandemic-era lows. Home sales were largely unchanged last year, reaching a 30-year low, and have remained weak this year. After dropping year-over-year, sales remained steady in April.

Numerous potential buyers have been unable to enter the market due to past soaring home prices, especially during the pandemic’s low-interest-rate period. Additionally, a shortage of homes for sale, partly due to insufficient new home construction over several years, has kept prices elevated despite ongoing sales decreases.

Homes purchased in May likely went under contract in March and April, when the average rate for a 30-year mortgage was between 6% and 6.46%, as reported by mortgage buyer Freddie Mac. Last week, the average rate was 6.48%, down from 6.85% the year before.

The upward trend in mortgage rates, staying below last year’s levels, has been influenced by the ongoing war with Iran, which disrupted global oil transport and increased oil prices. Elevated oil prices have also raised bond yields that dictate home loan pricing, contributing to the rise in mortgage rates. Ted Rossman, principal analyst at Bankrate, suggested that absent the war-related inflation spike, mortgage rates could be in the mid-to-upper 5% range.

In spite of mortgage rate uncertainty, first-time buyers comprised 35% of May’s home purchases, the highest proportion since June 2020, as noted by Yun. Historically, first-time buyers made up 40% of sales. Current market conditions have benefited buyers, with median list prices decreasing by 2.4% from the prior year, the most significant drop since 2017, according to Realtor.com.

The available homes have increased slightly, providing more options for buyers, although inventory remains below historical levels. As per NAR, there were 1.55 million unsold homes at the end of May, up by 3.3% from April and 0.6% from the previous May. However, this number is lower than the typical supply of 2 million homes available before the COVID-19 pandemic. The inventory at May’s end represents a 4.5-month supply at the current sales pace, while a balanced market traditionally ranges between a 5- to 6-month supply.