New Home Sales Jump As Average Prices Drop Third Most Ever

Reports of the housing bubble’s demise were greatly exaggerated.

Or at least that’s what a simplistic reading of new home sales data, out Friday, suggested. It’s possible to tell a slightly different story, depending on your penchant for nuance and extrapolation.

Sales rose almost 11% in May, government figures showed (figure below). The annual pace, at 696,000, nearly matched the highest forecast from four-dozen economists.

The rebound came as a relief for those fearing recession. Sales logged a dramatic decline in April, prompting some observers (myself included) to declare the beginning of the end for the post-pandemic property frenzy.

Headline prints for April and March were both revised higher on Friday. April’s decline was 12%, still large, but much better than the initially reported 16.6% drop.

Months’ supply fell to 7.7 last month, down from 8.3, another bullish sign for a market many expect to cool rapidly. In April, months’ supply rose by the second most ever.

Recall that although sales fell sharply in April, prices went parabolic, presumably as buyers rushed to lock in rates with borrowing costs surging. In May, average prices plummeted by $58,000, completely reversing April’s gain. The 10.2% MoM drop was tied for the third largest in history (figure below).

Obviously, I’m reaching. I’ll be the first to admit as much. Average prices are skewed anyway and the monthly series is more noise than signal. Still, the drop is worth a quick mention, especially considering the YoY pace decelerated rapidly, from more than 30% in April to less than 15% in May.

Median prices fell from the prior month too, but only slightly (to $449,000 from $454,700). The YoY gain of 15% was cooler than March and April, but the deceleration wasn’t as dramatic as that seen in average prices.

Again, I’d emphasize that this series is volatile and markets pay more attention to existing home sales, which logged a fourth consecutive monthly decline in May, according to data out earlier this week. A measure of backlogs in Friday’s numbers hit a multi-month high.

Unexpected strength in new home sales won’t do much to dispel concerns over the sustainability of price gains, especially not with mortgage rates at the highest since 2008 and layoffs piling up. JPMorgan said this week it’s laying off hundreds of employees in home-lending and reassigning scores more in a preemptive move the bank described as “a result of cyclical changes in the mortgage market.”

“We see this as a short term blip higher for a series that is in a very clear downward trend,” ING’s James Knightley said Friday, of the new home sales headline. “Surging borrowing costs and a general lack of affordability mean transaction numbers will fall sharply in coming months and with supply on the rise, home price growth will slow sharply and likely fall in some areas.”

On Thursday, Moody’s chief economist Mark Zandi predicted a “coast to coast” housing correction, but said that absent defaults and distressed sales, a large decline or a crash is “just not going to happen.”