New home sales rose unexpectedly in May despite rising mortgage rates and an otherwise cooling housing market. The increase was driven by more supply coming online, pushing prices down for the first time since February.

Sales increased by 10.7% on the month to 696,000 new homes annualized, after falling by an upwardly revised 12% in April, according to Commerce Department data released on Friday. That rise was the first time that new home sales had increased since the start of the year.

The increase came as a surprise given the steep rise in mortgage rates in recent weeks and the recent decline in existing home sales.

The inflow of new supply, according to recent data on housing starts, helped to push sales higher while keeping prices lower. The median price for new homes dropped by 1.3% on a monthly basis in May to $449,000, down from the record of $454,700 in April.

Sales rose in the South and West regions, while declining in the Northeast and Midwest.

The number of homes for sale at the end of the month was 444,000, up from 437,000 in the prior month. At May’s selling pace, new home inventory could last 7.7 months, down from 8.3 months previously. That suggested a healthy level of inventory, which will continue to keep prices in check.

The takeaway

Together with recent reports on home sellers lowering prices, we expect home prices to continue to moderate in the coming months, an encouraging sign for the Federal Reserve in its fight against inflation.