U.S. new home sales climb to highest level in a year, led by the South

New homes sales surged 6.2% in October to a seasonally adjusted annual rate of 430,000, the U.S. Commerce Department announced Wednesday, as buyers rushed to take advantage of what many believed would be the end of the $8,000 tax credit for first-time home buyers on October 30.

However, Congress has since extended the first-time home buyer credit through April 30, 2010.

Economists surveyed by Bloomberg News had expected October new home sales to register a 410,000 annualized rate.

September's new home sales were revised higher to a 405,000 annual rate, from the previous released 402,000 rate; new home sales totaled a 415,000 annual rate in August, 419,000 in July, and 399,000 in June.

Further, new home sales are up 5.1% in the past year. That single-digit rise doesn't sound like much, but that's a marked improvement from the more than 20% year-over-year decline recorded earlier in 2009.

One qualifier: the South accounted for all of October's increase in new home sales, with a 23.2% gain; sales fell 5.1% in the Northeast, 5.1% in the West, and 20.0% in the Midwest. Even so, in the past year, sales are up in every region, except the Midwest: since October 2008, sales are up 5.7% in the Northeast, 8.4% in the South, 8.1% in the West; they're down 11.1% in the Midwest.

Also, the median sales price of a new house in October was $212,000 and the average price was $261,000.

Inventories Continue To Fall

Further, there was one unqualified bright spot in the October new home sale data: Inventories fell again, as builders maintained an inventory of 239,000 units, or a 6.7-month supply at the current sales rate; inventories totaled a 7.5-month supply in September. A healthy, normal new home sales 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 to 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 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.

Housing Analysis

October was a good month for new home sales, although the data was skewed by the large increase in sales in the South, which accounted for the entire month's rise. Still, given the slump the housing market has been in, investors and economist will take the October rise, just the same. That said, new home sales moving forward will be illuminating: What investors don't want to see is new home sales continuing to fall in three regions -- given the federal tax credit's extension, the calculation here is that they won't.

In addition, the decline in inventories is another sign of a healing housing sector. If inventories can fall below a four-month supply by the end of 2010, that would be another sign of housing market stabilization.
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