By Sharon Nunn and Paul Kiernan 

WASHINGTON -- Sales of new homes in the U.S. rose heading into the summer months, despite high selling prices and low home inventory.

Purchases of newly built single-family homes -- a relatively narrow slice of all U.S. home sales -- grew 6.7% to a seasonally adjusted annual rate of 689,000 in May from April, the Commerce Department said Monday.

Still, previously owned-homes sales, which represent the bulk of the housing market, have declined from a year earlier in four out of the first five months of this year, signaling home buying in the spring may be stuck in neutral. Meanwhile, the pace of new-home sales still remains well below the elevated levels seen before the 2007-09 financial crisis and recession.

"The rise in new home sales is likely related to the historically low inventory of existing homes on the market," said Ben Ayers, senior economist at Nationwide. "With fewer buying options among existing homes, home-buyer demand is shifting towards new builds. New home construction is also increasing with housing starts up to an expansion high in May."

New-home sales data can be volatile. May's 6.7% gain came with a margin of error of 14.1 percentage points, but the longer-term trend shows growth. From the prior year, sales increased 14.1% in May.

Sales in the South appeared to drive last month's growth. New-home purchases in the region rose 17.9%, the largest gain since the end of 2014. Meanwhile, sales in the Northeast and West declined and purchases were flat in the Midwest in May.

More widely, housing market inventory has been tight, driving up home prices and pricing some potential buyers out of the market. Scarce construction labor and rising material costs and mortgage rates are also headwinds for the housing market.

The average interest rate on a 30-year fixed-rate mortgage in May was 4.59%, up more than half a point from 4.03% in January, according to Freddie Mac. Record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017, according to the National Association of Home Builders.

At the current sales pace, there was a 5.2-month supply of new homes on the market at the end of May, below the 5.6 level seen at the beginning of this year.

The "supply figures have been mostly below 6, the traditional mark of a balanced market, for years, but the inventory situation is much worse for existing homes, where realtors complain of a chronic and acute shortage of quality homes for sale," Stephen Stanley , chief economist at Amherst Pierpont Securities, said in a note to clients.

Home builders' future expectations of single-family home sales fell two points in June, according to NAHB's recently released housing-market index, though sentiment remains solid.

"Improved economic growth, continued job creation and solid housing demand should spur additional single-family construction in the months ahead," NAHB Chief Economist Robert Dietz said in a statement. "However, builders do need access to lumber and other construction materials at reasonable costs...particularly for the entry-level market where inventory is most needed."

Write to Sharon Nunn at sharon.nunn@wsj.com and Paul Kiernan at paul.kiernan@wsj.com

(END) Dow Jones Newswires

June 25, 2018 13:07 ET (17:07 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.