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New Home Sales pulled back sharply in May

Summary

New Home market softening as rates restrict activity

New home sales fell 11.3% to a 619K-unit pace in May, the weakest pace since November 2023. The new home market has softened recently alongside higher mortgage rates, increased availability of existing homes and a more moderate pace of economic growth. Although these factors are likely to remain as a constraint moving forward, an uptick in mortgage applications for purchase so far in June suggests that the small dip in mortgage rates over the past several weeks will translate to a slightly stronger pace of home sales in coming months.

Looking further ahead, the Federal Reserve appears poised to initiate a rate cutting cycle later this year, which should help mortgage rates fall further. While lower rates likely will help improve affordability conditions for buyers and make pricing incentives less of an imperative for home builders, a deteriorating macroeconomic backdrop marked by higher unemployment and slower income growth will likely continue as headwinds for the new home market.

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