U.S. new home sales fall slightly in May

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Just call it "a wash" or a "do-over," to borrow a sand-lot baseball phrase. New home sales were essentially unchanged in May, they dipped 0.6 percent to a seasonally adjusted annual rate of 342,000, the U.S. Commerce Department announced Wednesday, as home builders continued to reduce inventories of unsold homes (pdf).

Economists surveyed by Bloomberg News had expected May new home sales to total a 365,000 annualized rate. Sales totaled a revised 344,000 annual rate in April.
Further, the effects of the worst recession in the housing sector in more than a generation can still be seen in the year-over-year data: new home sales are down 32.8 percent in the past year.

Sales price decline slows

Meanwhile, the median sales price for new houses sold in May fell 7.8 percent to $221,600 from $229,300 in May 2008, the Commerce Department said. It was the smallest year-over-year decline in the median sales price registered this year. Also, the median sales price rose for the second straight month, climbing 4.2 percent, to $221,600.

A continuing bright spot: inventories of unsold new homes declined 2.3 percent in May to 292,000 or a roughly 10.2-month supply at the current sales pace. A healthy, normal new home sale market typically has a three to five month supply of new homes on the market.

Aaron Smith, a senior economist for Moody's Economy.com in West Chester, Pennsylvania, said investors, and prospective home owners for that matter, should keep an eye on interest rates for clues to where home sales and prices are headed.

"Further increases in mortgage rates would be a huge concern amid rising unemployment and falling incomes," Smith told Bloomberg News Wednesday.

In May, new home sales rose in three regions: the Northeast, up 28.6 percent; Midwest, up 18.6 percent, and West, up 1.3 percent. They fell 8.5 percent in the South.

Investors should follow the new homes sales statistic because, historically, increases in home sales are strongly correlated with increased demand and an economic expansion. That's because housing activity does not operate in vacuum. When new homes are sold, homeowners tend to buy durable goods/big ticket items for the new home: furniture, appliances, home supplies -- an uptrend in each of which is good news for the economy and bullish for the U.S. stock market.

However, government statisticians also caution that the new home sales statistic contains a margin of error, also known as a sampling error, and is subject to revisions. Further, economists note that it typically takes 3-5 months to detect a trend, so investors should not read too much into data from one month.

Housing Analysis: Again, the May decline in new home sales was so small, we're putting it in the category of "statistically insignificant": the margin of error, let alone the customary revision, could reverse the May total. Hence, the housing sector stabilization story remains in place. Along that line, and equally telling, was the median sales price trend: the annual rate of decline is decreasing, and that again, historically, has represented the sign of a housing market forming a bottom.
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