New Home Construction Must Grow by 50%, Says Realtors' Yun

Updated from 10:53 a.m. with additional details and commentary.

NEW YORK ( TheStreet) -- Existing home sales rose 4.2% in May, more than expected, to the highest level since November 2009.

The National Association of Realtors said Thursday that total existing home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose to a seasonally adjusted 5.18 million in May from 4.97 million in April and is 12.9% above the 4.59 million- unit pace in May 2012.

The national median home price for all home types was $208,000, up 15.4% year-over-year, marking the sixth consecutive month of double-digit gains. The gains were the strongest since October 2005, when home prices jumped by a record 16.6% from a year earlier.

Home prices are soaring as buyers are returning to the market only to find an acute shortage of homes. Existing home sales have been constrained by the fact that many homeowners owe more on their mortgage than their homes are worth and as a result are unable to sell. Meanwhile, construction of new homes, which came to a virtual standstill after the bust, has only slowly begun to pick up again.

"The housing numbers are overwhelmingly positive. However, the number of available homes is unlikely to grow, despite a nice gain in May, unless new home construction ramps up quickly by an additional 50 percent," NAR economist Lawrence Yun said. "The home price growth is too fast, and only additional supply from new homebuilding can moderate future price growth."

Homebuilder stocks were falling Thursday, with ETF SPDR S&P Homebuilders ( XHB) down 3.8%. The iShares Dow Jones US Real Estate ( IYR) was shedding 2.13% .

Total housing inventory at the end of May rose 3.3 percent to 2.22 million homes available for sale, which represents a 5.1-month supply at the current sales pace, down from 5.2 months in April. Listed inventory is 10.1 percent below a year ago, when there was a 6.5-month supply.

The inventory crunch has meant that homes listed for sale are flying off the market.The median time on the market for all homes in May was 41 days, down from 46 days in April. Forty five percent of all homes sold in May were on the market for less than a month.

Short sales were on the market for a median of 79 days, while foreclosures typically sold in 43 days and non-distressed homes took 39 days, according to the report.

Distressed homes - foreclosures and short sales - accounted for 18 percent of May sales, unchanged from April, but down from 25% in May 2012. The declining share of foreclosure sales and short sales, which typically sell at depressed prices, is another reason for rising home prices.

Investor demand for foreclosed homes is also reducing the discount between market prices and foreclosure sale prices. Foreclosed homes on an average sold at a 15% below market value, while short sales sold at a 12% discount.

First-time homebuyers accounted for 28% of the purchases in May. All-cash sales accounted for a third of the transactions. Individual investors accounted for 18% of the sales in May, down from 19% in April.

Diane Swonk, chief economist of Mesirow Financial, said in a blog post noted that the share of first-time home buyers was down a full 6% from a year ago and called it a "disturbing trend".

"An overhang of student debt and persistently tight mortgage conditions accounts for the relative weakness in first-time buyer demand. If this persists, it could cause problems once investor demand abates later in the recovery. Trade-up buyers need first-time buyers to sell their properties if they hope to move up," she wrote.

Swonk expects more sellers to come off the sidelines given the strong price increases seen recently. This should moderate home prices heading into 2014. But the key for a sustainable housing recovery is getting first-time home buyers back into the market, she said.

-- Written by Shanthi Bharatwaj New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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