As I expected, Existing home sales surprised upward in May but declined for a fourth straight month, hitting an 11-month low. According to the National Association of Realtors (NAR), they decreased by 0.9% MoM, reaching 5.80M (down from 5.85M prior). Once again, the fall can be mainly explained by two factors, namely weaker affordability and lack of supply.

1. High home prices squeezed some first-time buyers out of the market

Housing affordability has been under pressure since January. Prices kept climbing at a fast rate. The NAR highlighted that “The median existing-home price for all housing types in May was $350,300, up 23.6% from May 2020 ($283,500), as every region registered price increases. This is a record high and marks 111 straight months of year-over-year gains since March 2012.”

Other reports confirmed that housing prices growth accelerated in May. Redfin reported, “The national median home-sale price hit a record high of $377,200, up a record 26% year over year.” Lastly, “The typical U.S. home grew in value by 13.2% year-over-year in May, and was up 1.7% from April, to $287,148 — both record highs in Zillow data that dates to 1996.” Most importantly, the YoY acceleration is mainly due to record short-term appreciation of the past few months as illustrated by the chart below. In this context, Lawrence Yun, NAR’s chief economist noted that “falling affordability is simply squeezing some first-time buyers out of the market.“

2. Lack of inventory kept weighing on home sales

One of the recent development related to the housing market has been the collapse in inventory, which pushed prices upward. The NAR underlined “Total housing inventory at the end of May amounted to 1.23 million units, up 7.0% from April’s inventory and down 20.6% from one year ago (1.55 million). Unsold inventory sits at a 2.5-month supply at the present sales pace, marginally up from April’s 2.4-month supply but down from 4.6-months in May 2020.” Over the same period, Redfin report also showed that “the number of homes for sale fell to a record low, down 27% from 2020.” This pattern was sometimes cited as a dampening factor on transactions.