After a rocky start to Q2, home sales bounced back in May as property values surged to new record highs.
Sales of new and existing homes rebounded in May, as spring buying season and competition for fewer listings drove prices to record levels.
The sale of existing homes rose 1.1% in May to a seasonally adjusted 5.62 million units, the National Association of Realtors (NAR) reported last week. The increase confounded a median estimate of economists, which called for a 0.5% decline. Sales were up 2.7% from a year ago.
The median sales price climbed to $252,800, surpassing last June’s average of $247,600 on route to a new peak. The average resale value of an existing home was up 5.8% annually, marking the 63rd consecutive month of year-over-year price gains.
Inventory has also thinned over the past year, with fewer listings in the affordable price range. NAR data showed unsold inventory was at a 4.2-month supply, which is down from 4.7 months in May 2016.
New home sales – a more volatile segment of the market that accounts for less than 10% of total transactions – also bounced back in May. Purchases increased 2.9% to a seasonally adjusted annual rate of 610,000 units, the Commerce Department reported last week. April’s sales pace was revised sharply higher to 593,000 units from 569,000.
The median sales price of a new residential property surged to $345,800 from $310,200 in April. That was the highest level ever recorded.
Housing market news wasn’t entirely positive last month. New residential projects, which are desperately needed to satisfy growing demand, declined unexpectedly. Housing starts fell 5.5% in May to a seasonally adjusted 1.092 million-unit pace. That was the lowest level of the year.
Building permits – a bellwether of future construction plans – dropped 4.9% to 1.168 million, which was the lowest since August.
Despite the monthly drop, analysts say an improving job market should lead to more home construction. However, builders continue to report rising material costs and a shortage of skilled workers, factors that will continue to drive up the cost of purchases.
At the same time, the official employment data do not speak to the quality of jobs being created, which means that more people could be priced out of the market. Based on income data, there’s reason to believe that the jobs recovery has been driven largely by lower-skilled positions that are less likely to see meaningful wage appreciation.
Homebuyers looking to lock-in at affordable rates will be happy to learn that mortgage costs have declined in recent months. Thirty-year mortgage rates fell below 4% in the final week of May and have remained below that threshold ever since. The average commitment rate on a 30-year fixed-rate mortgage was 3.90% in the week ended June 22, based on the most recent survey courtesy of Freddie Mac.
Financing costs have declined even as the Federal Reserve raised interest rates at its most recent monetary policy meeting. The Fed not only raised the federal funds rate by 25 basis points, it also maintained its outlook for three interest rate increases this year. With two down, that leaves December as the next likely rate-hike date, based on the most recent Fed Fund futures prices.
In signaling for higher interest rates, policymakers have shrugged off growing concern over a slowing economy. Data ranging from consumer spending to inflation and up to manufacturing have signaled renewed weakness in the economy, which may temper expectations about a second quarter rebound. Gross domestic product expanded just 1.2% annually in the first quarter, revised estimates showed.