New home sales surge to highest rate in ten months

New homes sales rose 9.6 percent to a seasonally adjusted annual rate of 433,000 in July -- the highest sales rate in 10 months -- the U.S. Commerce Department announced Wednesday, providing additional evidence that the nation's worst housing slump in a generation is ending.

Further, it was the fourth straight monthly rise for new home sales, which have battled back after sinking to a record-low 329,000 annual rate in January. Economists surveyed by Bloomberg News had expected July new home sales to register a 390,000 annualized rate. Sales totaled a 384,000 rate in June.

Sales are still down 13.4 percent in the past year, but that's nevertheless an improvement over the more than 21 percent year-over-year decline recorded earlier in 2009.

In addition, the median price for a new home fell 11.5 percent in the past year to $210,100 from $237,300 in July 2008.

Home inventories continue to fall

Meanwhile, inventories declined 3.2 percent in July to 271,000 and have now fallen 35 percent since July 2008 to total a 7.7-month supply at the current sales pace; that's down from an 8.8-month supply in June. Still, although inventories are declining, economists are careful to point out that the inventory decline originated in a 2009 housing market bloated with foreclosed home, builders' speculative excesses, and a large supply of homes by typical Americans unable to sell at what they consider an acceptable price, due to a lack of buyers. A healthy, normal new home sale market typically has a three-to-five month supply of homes on the market.

In June, sales rose in three regions: Northeast, up 32 percent; South, up 16 percent, and the West, up 1 percent. They fell 7.6 percent in the Midwest.

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/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 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 market mechanism -- basically lower home prices -- is stimulating home sales. The four-month uptrend suggests that seekers of new homes are starting to bite at the better values brought about by the decline in home prices. Federal government home programs, including the $8,000 income tax credit, are also supporting sales. That said, new home sales are still at a low level, and will not move the U.S. GDP needle that much, but the data provides more evidence that the housing market is bottoming.
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