Is housing hitting bottom?

Tepid conditions persist in the new home sector, but lukewarm activity was still enough to ignite hope for a possible housing bottom later this year.

New home sales were roughly unchanged in March, the U.S. Commerce Department announced Friday, boosted by an upward revision in new home sales for the two previous months (pdf). New home sales fell 0.6 percent to a seasonally-adjusted annual rate of 356,000 from 358,000 in February. The February figure was revised up from 337,000, and January's sales pace was revised to 331,000 from 322,000.

Economists surveyed by Bloomberg News had expected March new home sales to register a 330,000 annualized rate. Further, sales have declined 30.6 percent in the past year.

Meanwhile, the median sales price of new houses sold in March fell 12.2 percent from a year ago to $201,400, the Commerce Department said. It was the lowest median home price since December 2003.

Is a housing bottom approaching?

James O'Sullivan, senior economist at UBS Securities LLC in Stamford, Conn., tried to make the case for a bottom in housing.

"Through the ups and downs, sales have been close to flat in recent months," O'Sullivan told Bloomberg News Friday. "We expect sales to start trending up again in coming months."

Meanwhile, inventories declined 5.2 percent in March to 311,000 to total a 10.2-month supply at the current sales pace. Inventories have declined 33.7 percent in the past year -- a large decline -- but economists underscore that the inventory decline originated in a housing market bloated with foreclosed homes, builders' speculative excesses, and a large supply of homes by typical Americans unable to sell their home at what they consider an acceptable price, due to the recession. A healthy, normal new home sale market typically has a three to five month supply of homes on the market.

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 durables goods and 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 sale statistic contains a margin of error and is subject to revisions. Further, economists note that it typically takes three to five months to detect a trend, so investors should not read too much into data from one month.

Housing Analysis: The investor stance toward the March new home sale report will vary depending on whether one emphasizes the bright side or the not-so-bright side. On the upside, we did see an upward revision in new home sales for February and January. On the downside, the nation still has a enormous 10.2-month supply of new homes on the market. That large inventory suggests that median prices, which have fallen 12.2 percent from last year to $201,400, are likely to fall further.

Bottom Line: When combined with a 4.57-million annualized sales rate for existing homes, it's clear that weak housing conditions persist in the nation. That said, the rate of sales decline appears to be moderating and inventories are dropping; that suggests the U.S. housing sector could start to form a bottom this year.

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