May 26, 2025 – The recent housing market landscape has been marked by fluctuations and last week’s development was no different. Mortgage rates saw a brief retreat last Friday after rising for three weeks due to factors such as the downgrade of the U.S. credit rating and the passing of the House tax bill. How long the declining trend will last, however, is not sure as uncertainty continues to linger on. Meanwhile, new home sales experienced an unexpected surge, reaching a three-year high in April, driven by builder incentives. The labor market also showed resilience, with a slight decline in initial jobless claims, although continuing claims remained elevated. Builder confidence, on the other hand, took a hit in May, while small business optimism deteriorated further in April.

Mortgage rates moderate but will likely bounce back this week: Mortgage rates retreated last Friday after trending up steadily for three straight weeks since early May. Longer-term U.S. Treasury yields, which mortgage rates tend to move in tandem with, had been climbing for weeks due to several reasons including: 1) the recent downgrade of U.S. credit rating by Moody’s, 2) the passing of the House tax bill that will likely increase budget deficit and push up Treasury issuance, 3) easing recession fears as the Trump administration walked back some tariff policies, and 4) the persistent inflation anxiety triggered by tariffs and the lack of clarity on their impact on prices. The 30-year Treasury bond yield surged above 5.1% earlier last week and reached levels not seen since 2023 but retreated from highs as President Trump called on Friday for a 50% tariff on EU goods. Following the yields’ movement, mortgage rates declined on Friday but remained higher than a week ago. With the announcement on Sunday that the 50% EU tariffs will be delayed until July 9^th, mortgage rates could resume their rising trend in the coming week.

New home sales unexpectedly rise to 3-year high: Sales of new U.S. single-family homes jumped 10.9% month-over-month and registered a seasonally adjusted annual rate of 743k units in April, the highest level since February 2022. New home sales far exceeded the consensus expectations of 693k units and advanced 3.3% from the same month of last year. Sharpe increases in sales activity from the prior month were observed in the Mid-west (+35.5%) and the South (+11.7%), and the West (+3.3%) also experienced a mild jump last month. The North-east was the only region with a decline month-over-month (-14.8%) and year-over-year (-25.8%). Builder incentives, which include mortgage-rate buydowns and price reductions, were likely the motivating factors that moved buyers off the sidelines last month. Meanwhile, new houses for sale continued to stay above 500k for the third consecutive month and were near their highest level since late 2007. With inventories of new homes for sales remaining high, builders could continue to be aggressive in their efforts to sell homes they have completed for the rest of the home buying season.

Labor market shows resilience as unemployment claims decline: Initial jobless claims for the week ending May 17 decreased to 227k, a dip of 2,000 from 229k recorded in the prior week, according to the latest data released by the Department of Labor. U.S. applications for unemployment have remained stable in the past four weeks, despite businesses’ concerns that the U.S. economy could be disrupted by tariffs and the ongoing trade wars. At the state level, California was one of the two states – along with Michigan - that saw a decrease of more than 1,000 initial claims filed during the week of May 10. Despite the drop in new filings for unemployment benefits, continuing jobless claims increased 36k during the week ending May 10 and reached 1.903 million. The latest reading remains near the 3 ½ year high attained in late April and suggests that those out of work are taking longer to find new jobs. A slowdown in the labor market could be forthcoming in the months ahead if continuing claims do not come down soon.

Tariffs and elevated interest rates drag down builder confidence: Builder confidence in the U.S. housing market fell sharply in May and reached the lowest level since December 2022, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The six-point drop in builder sentiment pushed the index down to 34 from 40 in the prior month, as interest rates remained persistently high while tariffs concerns continued to linger on. The latest HMI survey also revealed that 34% of builders reduced home prices in May, an increase from 29% recorded in April. Meanwhile, sales incentives were used by 61% of builders, unchanged from the rate recorded in the previous month. Regional HMI scores showed declines in all regions in May, with the West dropping the most by eight points, and the Northeast sliding the least by one point.

Small business optimism deteriorated further in April: The NFIB Small Business Optimism Index dipped for the fourth consecutive month as cloudy economic outlook continued to weigh in on sentiment. The confidence index of small business owners dropped another 1.6 points in April to 95.8, remaining below the 51-year average of 98 for the second straight month. The level was also the lowest in six months, as six of the ten components that make up the index declined from the prior month. The share of owners reported job openings they could not fill dipped six points to 34% last month, the lowest level since January 2021. The downward trend in small business employment could be an indication that a labor market slowdown is forthcoming if the economic outlook remains murky. Those who expected business conditions to improve six months from now also dropped six points to 15 but remained in the positive territory, despite sliding to the lowest level since October 2024. The uncertainty index remained elevated but declined by 1.6 points to 95.8 in April and was still well above the historical average of 68. The share of small businesses that plan to raise prices in the next three months dipped two points in April, a sign that suggests tariffs may not trigger any meaningful price hike in the immediate term.

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