June 25, 2021

Existing home sales suffered another setback in May as price pressure grew even stronger. New home sales also slid, with construction-related shortages holding back activity. And despite yet another historic inflation release, mortgage rates remain near record lows.

Existing home sales slip for a fourth straight month

*Existing home sales fell 0.9% from April, to 5.8 million (SAAR).

*The median existing-home price in May was $350,300, up a record 23.6% from May 2020.

Supply shortages hold new home sales back

*New home sales fell 5.9% in May from April, to 769,000 (SAAR).

*The median sales price of new houses sold in May 2021 was $374,400, up 2.5% from April and 18.1% year-over-year.

Mortgage rates continue to brush off inflation data

*Core PCE – the Federal Reserve’s preferred measure of inflation – increased 3.4% year-over-year in May, the fastest annual increase since 1992.

*A change in leadership at the Federal Housing Finance Agency could doom some proposed programs.

So what? 

While homes continue to sell incredibly quickly and bidding wars persist in many markets, it’s becoming clear that record high price growth and an enduring shortage of available homes are beginning to hinder would-be homebuyers. The 0.9% setback in existing home sales in May was the fourth straight monthly decline. But, encouragingly, there are some signs emerging that this sales slowdown may be passing. The National Association of Realtors’ inventory measure has risen month-month in each of the past three months — something that we would normally expect to see as the spring selling season gets into full swing, but nothing to take for granted in an abnormal market still distorted somewhat by pandemic-related factors. And Zillow’s measure of for-sale inventory increased in May from April, the first monthly increase since July 2020. While the recent inventory trends aren’t going to bring balance to the market overnight, they are welcome signs for a market that is hungry for more supply. What’s more, higher frequency indicators suggest that slowdowns in buyer activity are starting to taper. Applications for home purchase mortgages increased 0.6% in the week ending June 18th – the third straight weekly uptick after falling 5 of the previous 7 weeks.

Much like existing home sales, supply-side constraints kept a lid on new home sales volume in May. But instead of limited inventory of existing for-sale homes, the materials in short supply for builders in May included key items, like framing lumber, that are crucial to the homebuilding process. Despite having fallen sharply in the last few weeks — lumber prices are still well above what they were a year ago, and many other key building materials have limited availability or none whatsoever. As a result, new home prices continue to push firmly higher and getting new projects started is becoming more difficult. According to data from the National Multifamily Housing Council, the share of builders reporting a need to re-price new multifamily projects by 5% or more jumped from 6% a few months ago to 69% more recently. Much like existing homes, buyer demand for new homes is still strong and builders in most markets are having little trouble selling through the homes they have put up — even to the point where they are limiting sales in some cases so they don’t completely sell through their stock. But the supply constraints are hindering the number of homes they’re able to build and ultimately sell, and the sales volume they can comfortably take on without exposing themselves to more price risks is somewhat limited. Still, despite the sharp pullback from more-recent highs, new home sales volume remains higher than any pre-pandemic high since 2007 — and year-to-date sales volume is up 27.2% from the same period in 2019 (prior to pandemic distortions).

Despite a slew of developments that would normally send them on an upward trajectory, mortgage rates continue to hold firm. The initial upward movements that followed last week’s announcement from the Federal Reserve have since leveled off, and the market continues to ingest the record-strong inflation figures with a collective yawn. Bond yields did rise on the news that core prices are rising at their fastest pace since 1992, but only slightly, and mortgage rates barely budged. Increasingly, it appears that investors are buying into the idea that these historic inflation figures are transitory – a temporary shock prompted by supply-related constraints on many key items – and that the real gauge of price pressures will come once supply chain restrictions ease (theoretically) later this year. The announcement of a bipartisan infrastructure bill was met with a similarly muted response. Combined, it suggests that, barring a substantial change in policy from the Federal Reserve, a meaningful upward trend in mortgage rates is unlikely in the near term. Another development on the mortgage front this week was the appointment of an interim Director at the Federal Housing Finance Agency – the organization that manages Fannie Mae and Freddie Mac. It’s not immediately clear how the news, which followed a Supreme Court ruling granting the President the ability to remove the FHFA Chair, will impact the mortgage and housing markets in the months to come. But some are predicting that a handful of recently-announced programs, including caps on the number of investor and second home mortgages that Fannie and Freddie can acquire, might be in jeopardy.

Click here to read past editions of Zillow’s Market Pulse updates.