New home sales inch higher

New home sales rose a statistically insignificant 0.7 percent to a 429,000 seasonally adjusted annual rate, the U.S. Commerce Department announced Friday.

Economists surveyed by Bloomberg News had expected August new home sales to register a 445,000 annualized rate. Also, July's new homes sales were revised lower to a 426,000 rate from the previously announced 433,000; sales totaled a 384,000 rate in June.

Inventories continue to fall

However, there was one unqualified bright spot in the August new home sale data: inventories continued to fall in August, dropping 4 percent to 262,000 units, or a 7.3-month supply at the current sales pace. That's down from a 7.7-month supply in July, and 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 homes, builders' speculative excesses, and a large supply of homes by typical Americans unable to sell at what they consider acceptable prices due to a lack of buyers. A healthy, normal new home sales market typically has a three-to-five month supply of homes on the market. In other words, although inventories have fallen, they still have a long way to go to get back to normal market conditions.

Also, sales are down 3.4 percent in the past year, but that's nevertheless a substantial improvement over the more than 21 percent year-over-year decline recorded earlier in 2009.

In August, by region, new home sales surged 12 percent in the West, were flat in the South, plunged 16 percent in the Northeast and fell 5.8 percent in the Midwest.

Meanwhile, the median price for a new home fell 11.7 percent in the past year to $195,200.

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 a 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 figure contains a margin of error and is subject to revisions.

Housing Analysis: As noted, new home sales increased by a minuscule, insignificant amount in August, but given what the U.S. housing sector has gone through in the past three years -- easily its worst contraction in more than 25 years -- we'll take the minor increase, just the same. That makes five months in a row that new home sales have risen -- long enough to declare an uptrend -- and investors should keep in mind that this is occurring amid constrained mortgage lending conditions: banks and mortgage lenders still aren't extending credit to many good-credit applicants.

Hence, if one assumes that mortgage availability will continue to normalize moving forward, that should provide a modest tailwind to sales. True, the current market has benefited from the federal government's $8,000, first-time home buyer income tax credit, which expires later this year: Congress is reviewing whether to extend it into 2010; if Congress chooses to do so, that would represent another decent tailwind for new home sales.

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