Sales Of New U.S. Homes Increased In May To Two-Year High

This “sounds like” good news about the residential housing market and much of what’s pointed to in this article runs contrary to the comments I made in a post on the blog yesterday.

Sales Of New U.S. Homes Increased In May To Two-Year High

By Lorraine Woellert - Jun 25, 2012 10:17 AM ET

Demand for new U.S. homes rose more than forecast in May as mortgage rates dropped, bolstering the residential real-estate market while other parts of the world’s largest economy cool.

Purchases climbed to a 369,000 annual rate, up 7.6 percent from the prior month and the most since April 2010, the Commerce Department reported today in Washington. The median estimate in a Bloomberg News survey of 67 economists was 347,000. The months’ supply dropped to the lowest in more than six years.

Falling borrowing costs and more affordable properties may keep luring buyers, even as a cooling job market and limited access to credit restrain the recovery. In a bid to reduce unemployment, sustain housing and prevent a global slowdown from stalling the expansion, the Federal Reserve last week extended a program to keep long-term interest rates low.

“It’s another sign of life in the housing sector,” said Brian Jones, a senior U.S. economist for Societe Generale SA in New York, who forecast a gain to 362,000. “It’s consistent with a gradual improvement in activity, but we’ve got miles to go before we get back to normal.”

Stocks held earlier losses after the report amid concern that a meeting of European leaders later this week will fail to help contain the region’s debt crisis. The Standard & Poor’s 500 Index dropped 1.5 percent to 1,315.07 at 10:16 a.m. in New York.

Bloomberg survey estimates for new-home sales, which are counted when contracts are signed, ranged from 327,000 to 375,000. The April reading was unrevised at the previously estimated 343,000, while March and February were revised up.

Prices Rise

The median sales price increased 5.6 percent from the same month last year, to $234,500, today’s report showed.

Purchases rose in two of four U.S. regions last month, led by a 37 percent jump in the Northeast, while the South climbed 13 percent. Demand dropped 11 percent in the Midwest and 3.5 percent in the West.

The number of newly constructed houses on the market edged up to 145,000 from a record low of 144,000 reached in April and March. The record high of 572,000 was reached in July 2006. The supply of new houses on the market at the current sales pace dropped to 4.7 months’, the lowest since October 2005, from 5 months in April.

In response to improving demand, builders broke ground on 516,000 single-family houses last month at an annual pace, up 3.2 percent from April and the most this year, the Commerce Department reported last week.

Gaining Confidence

The Washington-based National Association of Home Builders/Wells Fargo sentiment index rose by 1 point this month to 29, the highest since May 2007, another report last week showed.

United Technologies Corp. (UTX) and Lennox International Inc. (LII), makers of heating and air conditioning units, are among companies benefitting from developers’ positive outlook. Lennox, based in Richardson, Texas, had a 40 percent increase in sales to new-home builders in the first quarter. United Technologies, in Hartford, Connecticut, forecasts about 700,000 housing starts this year, Chief Financial Officer Gregory Hayes said.

“The expectation is we’re not going to see a huge recovery in the U.S. residential marketplace, but we should see a steady recovery,” Hayes said at a June 14 conference. “Residential is coming back, but it’s very, very slow.”

The stabilization in housing has boosted builder shares this year. The Standard & Poor’s Supercomposite Homebuilder Index has climbed 33 percent this year through June 22, compared with a 6.2 percent gain for the broader S&P 500.

Builders’ Contribution

Residential construction hasn’t contributed to economic growth over the course of an entire year since 2005, when it accounted for 0.4 percentage point of the 3.1 percent increase in gross domestic product. From 2006 through 2009, the homebuilding slump subtracted 0.8 percent point from growth on average. The declines diminished over the past two years.

Newly constructed houses made up 6.7 percent of the residential market last year, down from a high of 15 percent during the boom of the past decade.

Sales of existing homes declined in May as fewer distressed properties reached the market, the National Association of Realtors reported last week. The decline in transactions involving foreclosures and short sales, where a lender agrees to accept less than the balance of the mortgage, helped push the median price of a previously owned house up 7.9 percent from the same time last year, the biggest 12-month gain since February 2006.

Less competition from existing houses and even lower mortgage rates may keep spurring the market. The average rate on a 30-year fixed loan dropped to 3.66 percent last week, the lowest in data going back to 1972, according to Freddie Mac.

The central bank last week aimed to keep borrowing costs low.

Policy makers announced they will expand the Operation Twist program to extend the maturities of assets on its balance sheet. They said they stood ready to take further action to put unemployed Americans back to work. Fed officials also lowered their outlook for growth and employment.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net