The June Jump in New-Home Sales Is Welcome -- but Hardly Robust

Considering how feeble the U.S. housing sector has been lately, any news to the upside is welcome. And the Commerce Department's report of an unexpected 23.6% month-over-month jump in new-homes sales, to an annual rate of 330,000 in June, definitely qualifies as welcome. However, that's progress is still quite modest because it stems from a revised 47-year-low base of 267,000 new-home sales recorded in May -- worse than the previously released record low of 300,000.

A Bloomberg survey had forecast a rise to a 310,000-unit annual rate in June. Sales totaled 422,000 and 384,000 annual rates in April and March, respectively.

Other statistics also provide some perspective regarding the June sales increase: Sales are still 16.7% below the 396,000 rate recorded in June 2009. Equally significant, inventories fell to a 7.6-month supply in June at the current sales pace, down from a revised 9.6-month supply in May, but still well above normal inventory of three to five months.

Six Months or More Needed to Reach Normal

In June, sales surged in three out of four regions. They rocketed 46.4% in the East, surged 33.1% in the South, jumped 20.5% in the Midwest, but fell 6.6% in the West.

The median sales price was $213,400 in June, an 0.6% decline from a year ago, but substantially better than the 9.6% year-over-year drop recorded in May.

The June data also suggest that new-home sales will need about two quarters, perhaps longer, to return to a normal 700,000-unit to 800,000-unit annual rate. Existing-home sales, which totaled a 5.37 million-unit annual rate in June, have already normalized. However, given the large inventory of existing homes -- an 8.9-month supply -- both the new- and existing-home markets could benefit from above-average sales to clear inventories and support U.S. GDP growth.

The factors weighing on both categories are largely macroeconomic. With inventories high, Americans sense that home prices will be lower in three or six months, causing many to delay a purchase. Prospective homebuyers are also concerned about the durability/strength of the U.S. economic recovery and its impact on the still-weak job market. Historically, job market uncertainty keeps a sizable percentage of homebuyers on the sidelines.

Should U.S. Subsidize Housing Sector?

The ongoing weakness in home sales leaves the U.S. faces a policy choice: Should it continue to rely on housing as an engine of growth? Or is the nation better-served if tax breaks, such as the longstanding home-mortgage interest deduction and short-term programs like the now-expired homebuyer tax credit, are shifted to other sectors or investments?

Despite the excesses and problems stemming from the housing bubble, public policy remains tipped in favor of support for housing. The bubble era represented not an indictment of home ownership per se, many economists agree, but untenable increases in home prices and sales triggered by exceedingly loose mortgage qualification requirements and by speculators, among other factors. Most of those excesses have been purged, returning the sector to a reliance on a rise in household formation -- i.e. sustainable demand increases -- as a primary component of growth.

Provided those bubble-era errors aren't repeated and that the U.S. always views housing as a derivative asset -- its value is based on the value of something else -- the housing sector will continue to add sustained value to GDP, while also providing many lifestyle and community benefits.

Let Housing Recover on Its Own?

Still,economists have been split over the appropriateness of the homebuyer tax credit, almost since the program was first proposed about a year ago (it ended April 30).

Economic conservatives generally argue that the tax credit didn't stimulate the economy on a net basis because it simply moved forward sales that would have occurred later, resulting in no new net GDP. These economists generally say the housing market should be left to recover on its own, regardless of the slumping sector's impact on U.S. growth.

Conversely, economic liberals generally argue that the tax credit brought Americans into the housing market who probably wouldn't have bought a home without the incentive, resulting in an increase in commercial activity. They also say these home sales, when combined with other growth-oriented policies, work toward a critical mass of stimulus needed for the U.S. recovery to advance to a sustainable status.

Even so, given the current austerity mood in Washington, it doesn't look like there's enough political support on Capitol Hill to extend the credit.