New home sales tumbled in May
Activity was down 13.7% from April, pushing new home inventory to nearly 10 months of supply as builders face increasing competition from the resale market.
New home sales fizzled out last month, a sign that even with incentives — like interest rate buydowns — potential homebuyers are staying on the sidelines.
Sales of newly built single-family homes dropped 13.7% between April and May, according to the U.S. Census Bureau, translating to a seasonally adjusted annual rate of 623,000 — well off the 665,000 pace last May. That pushed the supply of new homes to 9.8 months; a year ago, it was 8.5 months. At the same time, existing-home inventory has also risen, hitting 4.6 months in May.
Elevated mortgage rates and economic uncertainty continue to be the main drivers of the slowdown, said Robert Dietz, chief economist at the National Association of Home Builders.
"The slowing of the housing market has occurred despite the growing use of builder sales incentives," Dietz wrote, noting that price cuts on new homes were up in early June.
Materials, new home prices on the rise: The slowdown comes at a time when material costs are going up. Just the threat of tariffs pushed some costs up earlier this spring, and it remains unclear what will happen when many of the 90-day pauses expire on July 8.
"If these tariffs remain in place, builders may be forced to pass costs onto buyers, compounding affordability issues," said Odeta Kushi, deputy chief economist at First American.
Of particular interest to home builders is Canadian softwood lumber, as duty costs for that material could double this fall. Past increases have not spurred more U.S. lumber production, so raising duties "will likely not increase supply but simply increase costs," said Jesse Wade, director of tax and trade policy analysis for NAHB.
That could push new home prices — which are continuing to rise — up even further. The median price of a new home sold in May was $426,600, 3.7% higher than April and 3% higher than a year ago, according to the Census report.
Where that leaves builders: NAHB's June sentiment survey found that 37% of builders were cutting prices, the highest share on record. And as they face competition from a growing, and somewhat more affordable, supply of existing homes, builders will need to focus even more on incentives, according to Kushi.
"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. They may need to rely more heavily on these incentives to entice those jittery buyers off the sidelines."