Three years into the worst housing slump since the Great Depression, a new report is offering more evidence that the residential real estate market is on the mend. New-home sales in June jumped 11 percent from the previous month, marking the sharpest such increase since December of 2000, the Commerce Department said Monday. Although the monthly increase is within the margin of error—and sales remain 21 percent below June 2008 levels—Monday's data help pull the three-month moving average of new-home sales up from its January lows, says Patrick Newport, an economist at IHS Global Insight. "That is telling you that sales are starting to grow," Newport says. "You can believe that."
Here are five things you need to know about the June new-home sales report:
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1. Low prices, cheap credit: Several factors were behind the stronger-than-expected June new-home sales report. One is that sales were so abysmally low in January—the market's nadir—that an increase was all but inevitable, Newport says. "The number [of new-home sales] had just fallen so low it had to come up," he says. But attractive mortgage rates and lower home prices (median prices dropped 12 percent, to $206,200, in June from a year earlier) helped push buyers off the sidelines. And at the same time, the federal government's $8,000 first-time home buyer tax credit tossed an additional incentive into the mix.
2. Inventory drop: Huge housing inventories have played a key role in the real estate slump, as the glut of unsold properties has dragged prices lower. But in an encouraging sign, the June report indicated that the housing inventory is continuing to decline. "Inventories have fallen 50 percent from the peak to the lowest level since February 1998," economists at Barclays Capital Research said in a report. "The sharp drop in inventories combined with the jump in sales pushed supply down to 8.8 months, the lowest since October 2007." The months' supply of unsold homes peaked at 12.4 in January.
3. 'Never been harder' to sell: It's important to note that despite the month-over-month increase in sales, it has become even more difficult to sell a new home. "Although the market for new homes is improving, selling a new home has never been harder," Newport says. "The median time that a new home sits on the market before selling rose to an all-time high of 11.8 months." One reason for that, Newport suggests, is that home builders may have less latitude to slash their prices.
4. Foreclosure pressure: Home foreclosures—which increased 15 percent in the first half of the year—represent another key head wind for the market. As foreclosures add to the total housing inventory, they will depress new-home prices as well. "While sales appear to be off of their cyclical bottom, we see limited upside or sales over coming months, while a steady stream of foreclosures will mean steady downward pressure on new home prices," Richard Moody, the chief economist at Forward Capital, said in a report.
5. Slow recovery: To be sure, the new-home sales report for June includes some encouraging data suggesting that the housing market is stabilizing. However, ongoing head winds—such as mounting foreclosures and the eroding labor market—will work to water down an eventual recovery. "While this sales volume remains decidedly below the long-run average (728k), the 17 percent bounce from the all-time low in January adds to the growing collection of data indicating that the housing sector is beginning to climb out of its 3½-year slump," researchers at Nomura Global Economics said in a report. "Still, as with the overall economy, the 'recovery' is likely to be slow and arduous."