U.S. new home sales surge in May: what this means for the construction industry

Data from the U.S. government showed sales of newly built homes throughout May rose 12.7% from the prior year -- a surprising metric given the COVID-19 pandemic.

Strongest May in years

Sales of new single-family houses in May came in at a seasonally adjusted annual rate of 676,000. This not only marks a 16.6% uptick from April but the strongest May pace of growth seen since 2007, according to CNBC. In fact, companies that construct homes were caught off guard themselves.

Housing starts were far from strong as home construction companies are struggling to keep up with the demand. 

The largest sales jump in May can be attributed to homes that are for sale but have yet to even begin construction. This resulted in a 15% year-over-year drop in the supply of homes for sale that was under construction.

Not all good news

Housing demand has seen an uptick in recent weeks so builders shifted their focus to sales of homes not yet under construction, Robert Dietz, the chief economist at the National Association of Home Builders, told CNBC.

This is due to limitations in the construction industry, he said. Labor and land constraints prompted homebuilders to produce too few single-family homes. The industry is now scrambling to hire new workers but it may prove to be even more so difficult during the pandemic. There was already a shortage of skilled workers months ago before the COVID-19 breakout.

Land and material prices are also moving higher, especially lumber prices.

What’s next for construction?

Florida-based Lennar Corporation (NYSE: LEN) slowed down its land purchases and housing starts in March but had to reverse course in April, according to CNBC. But the company was already constructing houses at a pace that was well below demand as it is still recovering from the housing crash more than a decade ago.

“We are shelter-supply-constrained, and that supply constraint means that all forms of shelter are going to thrive in the current market and probably be sustainable for the next year or two,” Lennar CEO and Chairman Stuart Miller said.

Looking forward the home construction industry could be impacted by the severity of an economic downturn and the many unknowns associated with the pandemic. Clearly, there was a brief period of pent-up demand but what will the demand equation look like if employment and wages fall.

Finally, the key millennial demographic group the industry counted on to enter the housing market is a giant question mark. The group’s spending behavior in a post-COVID world remains unclear.

“They are the key demographic group to watch for the housing market in the years to come,” Peter Boockvar, chief investment officer at the Bleakley Advisory Group, also told CNBC.