Rise in new home sales signaling stability

New home sales continue to wallow near the bottom, and home builder confidence remains stuck in the basement, but sales did unexpectedly rise for the second consecutive month and the supply of homes of sale continues to recede, with one major caveat. More later.

The U.S. Commerce Department reported this morning that the sale of new homes rose 7.3% in April to a seasonally adjusted annual pace of 323,000, while the supply of homes on the market based on sales fell from 7.2 months to 6.5 months.



The actual supply of houses slipped from 180,000 to 175,000, the fewest number of houses available for sale since the government began tracking new home sales in 1963! That’s really quite stunning given the sizable increase in population over the past 48 years.



And the lack of supply available speaks volumes about the drop in home builder confidence, as builders have reined in excess home production in response to very poor conditions.

One the one hand, the lack of inventory could quickly set the stage for a rebound in housing if demand were to suddenly materialize.

Longer-term, housing formation is expected to pick back up, Bloomberg News noted three weeks ago.

“Between 750,000 and 1 million new households will be created in 2011, predict UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau.

However, the shadow inventory of houses that banks hold has been and will very likely continue to be a stiff headwind for the market.

The New York Times reported on Sunday that banks and mortgage lenders own 872,000 houses. Moreover, they are in the process of “foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.”

As the first chart reflects, the market appears to be trying to bottom out, but builders are still facing stiff competition from a heavy supply of newer model homes that are either in foreclosure or are bank owned. And let's not forget short sales.

Until we see a more realistic level of job creation and potential buyers no longer fear further price declines, stating that a recovery in the new home market is at hand appears to be a bit premature.

More realistically, we're just bouncing along the bottom.