WASHINGTON (Reuters) - U.S. home sales unexpectedly fell for the second straight month in May as an acute shortage of properties on the market pushed house prices to a record high.
The sales decline, which was reported by the National Association of Realtors (NAR) on Wednesday, indicated the housing market was continuing to lag a strong economy and would likely not contribute to growth in the second quarter.
Home sales have largely treaded water this year as strong demand depletes the supply of properties on the market, causing house prices to rise faster than wages.
For U.S. Mortgages interactive graphic click tmsnrt.rs/1SQgDJa
The median house price increased 4.9 percent from a year ago to an all-time high of $264,800 in May. In contrast, annual wage growth has been stuck below 3 percent even as the unemployment rate has dropped to an 18-year low of 3.8 percent.
“Supply is woefully inadequate to meet demand, which is pushing prices ever higher and contributing to mounting affordability woes,” said Aaron Terrazas, senior economist at Zillow in Seattle. “It’s hard to tell if, when and how this cycle gets broken.”
Existing home sales slipped 0.4 percent to a seasonally adjusted annual rate of 5.43 million units last month, the NAR said. Economists polled by Reuters had forecast existing home sales rising 1.5 percent to a rate of 5.52 million units in May.
Last month, sales rose in the Northeast, but fell in the West, South and Midwest. Existing home sales, which make up about 90 percent of U.S. home sales, dropped 3.0 percent on a year-on-year basis in May. They have declined on that basis for three straight months.
Supply has been especially tight at the lower end of the market, which accounts for a large portion of the housing market. According to the NAR, sales of homes priced below $100,000 plunged about 18 percent in May from a year ago.
With mortgage rates rising back to seven-year highs, purchasing a home could become even more expensive for first-time buyers. Mortgage rates could rise further after the Federal Reserve raised interest rates last week for a second time this year and forecast two more rate hikes before the end of 2018.
May’s weak sales suggested less in brokers’ commissions in the second quarter, leading economists to trim their gross domestic product estimates for the April-June period by one-tenth of a percentage point. Second-quarter growth estimates are above a 4.5 percent annualized pace.
The economy grew at a 2.2 percent rate in the first quarter, with residential investment contracting.
U.S. Treasury yields rose after Fed Chairman Jerome Powell said the U.S. central bank should continue with a gradual pace of rate increases.
Stocks on Wall Street were trading mostly higher while the dollar .DXY hovered near 11-month highs against a basket of currencies.
There were 1.85 million previously-owned homes on the market in May, down 6.1 percent from a year ago. Supply has declined for 36 straight months on a year-on-year basis. The pipeline of foreclosures has also dried up, with distressed sales making up a record low 3 percent of transactions last month.
At May’s sales pace, it would take 4.1 months to exhaust the current housing inventory, up from 4.0 months in April. A six-to-seven-month supply is viewed as a healthy balance between supply and demand.
Houses for sale typically stayed on the market for 26 days in May, matching April’s seven-year low and slightly down from 27 days a year ago. Fifty-eight percent of homes sold in May were on the market for less than a month.
First-time buyers accounted for 31 percent of transactions in May, down from 33 percent in both April and May 2017. Economists and realtors say a 40 percent share of first-time buyers is needed for a robust housing market.
Builders have struggled to plug the inventory gap, citing higher prices for lumber as well shortages of land and labor. At the same time, Americans are staying longer than 10 years in their first home. There is, however, cautious optimism that the inventory squeeze will ease by the end of this year.
The Commerce Department reported on Tuesday that housing starts increased 5.0 percent to a rate of 1.350 million units in May. Housing completions increased 1.9 percent to a rate of 1.291 million units last month.
Some economists believe rising mortgages could lead to a slowdown in demand that might solve the supply problem.
“The upward trend in mortgage rates will pull affordability below a critical point and start to seriously erode demand and appreciation, at which point the reduced return on homes as an asset will prompt more homeowners to sell, breaking the tight market fever,” said Andres Carbacho-Burgos, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.
Reporting by Lucia Mutikani; Editing by Paul Simao