May home sales increase very slightly, but prices hit another record high

U.S. existing home sales saw a modest 0.8% month-over-month increase in May to a 4.03 million annualized rate, surpassing analyst expectations, primarily supported by a significant 20% year-over-year rise in inventory. Despite persistently high mortgage rates, the median existing home price hit a record high for May at $422,800, up 1.3% year-over-year, underscoring continued demand and pricing pressure. The National Association of Realtors anticipates sales growth in the latter half of the year should mortgage rates decline, buoyed by strong income growth and healthy inventory.

Analysis

U.S. existing home sales demonstrated unexpected resilience in May, rising 0.8% month-over-month to a 4.03 million annualized rate, contrary to consensus forecasts of a 1% decline. This modest uptick was primarily facilitated by a significant 20% year-over-year increase in housing supply, which reached 1.54 million available units. Despite this inventory growth, the market remains constrained by persistently high mortgage rates, which exceeded 7% when many of these sales contracts were initiated. This affordability pressure is evidenced by a 0.7% year-over-year decline in sales, a drop in first-time buyers to 30% of the market, and a rise in all-cash transactions to 27%. Pricing power remains robust, with the median home price hitting a record for May at $422,800, a 1.3% annual increase, and 28% of homes selling above list price. Notably, the high-end market ($1 million-plus) has lost its outperformance momentum, with sales falling year-over-year, suggesting that even affluent buyers are sensitive to current economic conditions, including stock market volatility.

Key Decisions for Investors

• Investors should recognize that the housing market's trajectory is critically tied to mortgage rates; any meaningful decline could unlock significant pent-up demand given strong income and job data, benefiting homebuilders and mortgage originators.
• The bifurcation of the market, with a rising share of all-cash buyers and falling participation from first-time buyers, indicates that affordability is the primary headwind, suggesting caution on companies exposed to the entry-level, mortgage-dependent consumer.
• Despite a 20% surge in inventory, record-high prices signal that supply remains insufficient to curb housing inflation, supporting the valuation of existing real estate assets and potentially limiting the scope for near-term price corrections.