What the Home Sales Jump Means for the Recovery

A key gauge of housing-market activity came in much stronger than expected in April, as sales of newly-built homes hit a two-year high. The Commerce Department said Wednesday that new home sales last month increased nearly 15 percent from March, to a seasonally-adjusted annual rate of just over 500,000. April's tally was nearly 48 percent above year-earlier levels. The firmer sales have helped the market chew through its once-massive backlog of unsold homes, with the months' supply of inventory falling to 5 from 10.6 a year earlier. "The supply of homes on the market plunged to a level we haven't seen since the year before Neil Armstrong and Buzz Aldrin landed on the moon!" Mike Larson of Weiss Research said in a report.

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The strong sales report is rooted in several factors. First, falling real estate values have made home purchases affordable again to many Americans. Median home prices dropped nearly 10 percent, to $198,400, from a year earlier. That's their lowest level since 2003. Meanwhile, 30-year fixed mortgage rates remained in an attractive range of just over 5 percent. In addition, recent labor-market improvement has made more buyers believe they have the financial wherewithal for a home purchase. "We hasten to caution, however, [that] some part of the recent sales surge is likely attributable to a last minute rush to take advantage of the home-buyer tax credits that expired in April," David Resler, the chief economist at Nomura Securities, said in a report.

Uncle Sam is handing out tax perks worth up to $8,000 to qualified home buyers who signed sales contracts by the end of April. "Since new home sales are recorded at the time of contract (but not the time of completion), whatever effects the tax credits will have on new home sales should be reflected in the April numbers," Resler said. And because the tax credit likely worked to pull sales that would have occurred in later months into April, new home sales are expected to weaken in the near term.

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"With the deadline over to qualify for the tax credit, sales of new homes will pull back over the next couple months," Celia Chen of Moody's Economy.com said in a report. "There is hope that the retrenchment will not be too severe, since the fundamental drivers of housing demand are improving: Job growth will pick up, and mortgage interest rates seem set to remain very low because of Europe's debt troubles."

But even if new home sales manage to hang on, a recovery in the overall real estate market still faces a towering obstacle, Larson says. "The 'used' home market is still oversupplied, and will remain that way for some time thanks to a continuing influx of distressed and foreclosed property," he says. While Larson doesn't expect this to precipitate a sales meltdown, he isn't expecting an aggressive near-term rebound either. "Instead we'll just bounce around the bottom for several quarters until all that inventory is burned off," Larson says. "If you want excitement, watch the Stanley Cup finals instead!"