WASHINGTON D.C.: As average home prices surged to a record high, reaching the $400,000 mark for the first time, and mortgage rates increased further in May, pushing out entry-level buyers from the market, existing U.S. home sales dropped to a two-year low.

This week, the National Association of Realtors reported that despite the fourth consecutive monthly drop in sales and declining affordability, the housing market remains fairly strong, with properties typically staying on the market for a record low 16 days. With supply still at low levels, prices could remain high, but sellers are reducing the list price in some areas with bidding wars.

"Existing home sales should continue to slow over the course of the year as mortgage rates move higher. But in the absence of a deep and sustained economic downturn, home sales should not drop as they did in the housing bust - allowing prices to continue to move higher, on average."

Last month, existing home sales fell 3.4 percent to a seasonally adjusted annual rate of 5.41 million units, the lowest level since June 2020 when sales were recovering from the COVID-19 lockdown. In the Northeast sales rose, but declined in the Midwest, the West and the densely populated South.

According to economists polled by Reuters, sales would drop to a rate of 5.4 million units, and a housing market downturn would require sales to decrease to a rate of between 4.0 million to 4.5 million.

Home resales, which account for the majority of U.S. home sales, declined 8.6 percent on a year-on-year basis last month.

In May, sales were mostly closing on contracts signed the previous one to two months, before mortgage rates began accelerating amidst rising inflation and the Federal Reserve's interest rate hikes.

According to data from mortgage finance agency Freddie Mac, released last week, the average contract rate on a 30-year fixed-rate mortgage jumped 55 basis points to a 13-1/2-year high of 5.78 percent, the largest one-week increase since 1987, and surging more than 250 basis points since January.