A key region sees its steepest drop in over a decade
US new-home sales dropped 13.7% in May to a 623,000 annualized rate, marking the steepest monthly decline since May 2022 and representing a seven-month low. The Commerce Department data released Wednesday fell below all estimates in a Bloomberg survey, signaling mounting pressures on the housing market.
Bloomberg reported that the decline reflects persistent affordability constraints as mortgage rates remain near 7%, creating barriers for potential buyers despite sales incentives offered by builders. The median sales price for new homes increased 3% year-over-year to $426,600 in May, marking the first annual price gain in 2025.
“This spring and summer are shaping up to be very tough for the real estate market,” said Heather Long, chief economist for Navy Federal Credit Union. “Buyers are staying on the sidelines as they worry about uncertainty and high mortgage rates.”
Builder confidence hits multi-year low
Homebuilder sentiment has plummeted to its lowest level since December 2022, with expectations for single-family sales over the next six months declining to their weakest point since November 2023. The pessimism stems from multiple challenges facing the industry.
“New-home sales tumbled in May, marking the steepest monthly decline since May 2022,” said Odeta Kushi, First American deputy chief economist. “Mortgage rates increased in May, reducing affordability, while elevated macroeconomic uncertainty continues to keep buyers on the sidelines.”
Rising costs squeeze margins
Construction input costs remain elevated, with overall residential construction input prices up more than 40% compared to pre-pandemic levels in May. Recent tariff actions threaten to push costs even higher, potentially adding $10,900 per home if they remain in place.
“The drivers behind builders’ increased pessimism are multi-faceted,” Kushi noted. “Elevated mortgage rates impact buyer affordability and result in higher financing costs for builders, who are already grappling with higher construction input costs.”
Inventory challenges mount
The number of new houses for sale increased slightly in May to the highest level since 2007, representing 9.8 months of supply at the current sales rate. Completed homes for sale rose to 119,000, an almost 16-year high.
Sales in the South, the nation’s largest homebuilding region, plummeted 21%—the steepest decline in nearly 12 years. Contract signings also fell in the West and Midwest, while the Northeast showed gains.
Market outlook
Economists forecast residential investment will remain a soft spot for the economy in coming quarters. Builder Lennar Corp. has indicated willingness to lower home prices and accept smaller margins to maintain market share.
“While one month doesn’t establish a trend, especially in such a volatile series, the decline in sales indicates buyer hesitancy,” Kushi said. “Nevertheless, builders can utilize tools like mortgage rate buydowns, design upgrades, and flexible pricing to attract buyers.”
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