US new home sales plunged unexpectedly last month

Sales of newly built homes dropped last month as mortgage rates remained elevated. New home sales, which make up only about 10% of the market, fell 11.3% in May from the prior month. That was the steepest monthly decline since September 2022 and marks the lowest level since November. May’s level was below the economists’ projections. Mortgage rates soared to the highest level of the year in early May and have since trended down. High interest rates, and expectations that they’ll remain elevated for longer than expected, are weighing on America’s homebuilders. US homebuilder sentiment soured in May for the second month in a row. That’s also taking a toll on the construction of new US homes. Housing starts fell 5.5% last month to a seasonally adjusted annual rate of 1.28 million units, the lowest level since 2020. Building permits dipped 3.8%. Persistently high mortgage rates are keeping many prospective buyers on the sidelines. Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages, and a dearth of buildable lots. The US housing market has for decades grappled with a chronic lack of homes available for sale, which has put some upward pressure on home prices. High prices and elevated mortgage rates, coupled with the persistent housing shortage, have undermined this year’s critical spring homebuying season. US home prices rose in May for the eleventh consecutive month to a record high. While that means Americans are stuck dealing with low housing affordability, it’s also proving to be a headache for the Fed: Inflation overall has eased substantially since reaching a four-decade high two years ago, but shelter costs have remained stubbornly elevated. The Biden administration has laid out its own solutions to the country’s housing crisis. Treasury Secretary Janet Yellen recently announced funding to support the financing of affordable housing. Vice President Kamala Harris and Housing and Urban Development Acting Secretary Adrianne Todman also announced grant funding toward a housing program that aims to identify and remove barriers to affordable housing production and preservation, and lower housing costs. Housing costs are a particular pain point for American households. The Biden administration has implemented measures to address this, including a cap on annual rent increases for low-income housing tax credit units and a reduction in Federal Housing Administration mortgage insurance premiums.