May existing home sales drop for a fourth straight month as affordability squeezes buyers out

• Sales of existing homes fell 0.9% in May to a seasonally adjusted annualized rate of 5.8 million units, according to the National Association of Realtors.
• The median price of an existing home in May was $350,300, a 23.6% increase compared with May 2020.
• There were just 1.23 million homes for sale at the end of May, a 20.6% drop from a year ago.

Sales of existing homes dropped for the fourth straight month due to a very low supply of homes on the market.

Existing home sales fell 0.9% in May from the previous month to a seasonally adjusted annualized rate of 5.8 million units, according to the National Association of Realtors. That is the fourth straight month of declines. The 5.8 million rate is modestly above pre-pandemic levels.

Sales were 44.6% higher from the same period a year ago, but that comparison is skewed massively given that the housing market basically shut down for about two months at the start of the pandemic. The market then rebounded dramatically last summer and remained strong for all of last year.

"Sales are essentially returning towards pre-pandemic activity," noted Lawrence Yun, chief economist for the Realtors association. "Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market."

There were just 1.23 million homes for sale at the end of May, a 20.6% drop from a year ago. At the current sales pace that represents a 2.5-month supply.

Very low inventory amid high demand continues to fuel extraordinary price increases. The median price of an existing home in May was $350,300, a 23.6% increase compared with May 2020. That is not only the highest median price ever recorded but also the strongest annual appreciation ever.

Prices are, however, skewed by the mix of sales. The market is now tilted toward the upper end, where there is far more supply of homes for sale. For example, sales of homes priced between $100,000 and $250,00 dropped 2% from a year ago, while sales of homes priced between $750,000 and $1 million jumped 178%.

Sales declined in every geographical area except in the Midwest, where homes are priced the lowest.

Mortgage rates fell pretty sharply in April, when the bulk of these contracts were signed. The average rate on the 30-year fixed ended March at 3.45%, and by the start of May the rate was heading below 3%, according to Mortgage News Daily. That would have helped give buyers some additional purchasing power, but the drop in rates was clearly not enough to offset fast-rising home prices.

Sales numbers for newly built homes — which are based on signed contracts, not closings — dropped 6% in April compared with March, according to the U.S. Census. Prices for those homes were up about 20% year over year.

"With four consecutive monthly declines in existing home sales, May's sales activity points to a potential moderation in growth for the remainder of 2021," said George Ratiu, senior economist at realtor.com. "As inflation is weighing on consumers' budgets and the Federal Reserve indicating it may pull back on its monetary easing sooner than anticipated, interest rates and high prices will keep affordability front-and-center for buyers."

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