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Rising new home sales point to a strengthening housing market

May sales of new single-family houses reached the highest level since April 2010, adding to evidence that the industry is no longer a drag on the broader U.S. recovery.

By Alejandro Lazo and Tiffany Hsu, Los Angeles Times

June 25, 2012, 5:52 p.m.

Sales of newly built single-family homes rose to their highest level in more than two years last month, adding to evidence that the U.S. housing market is on the mend and no longer dragging down the broader national recovery.

Real estate helped bring the U.S. out of past recessions as interest rates dropped, home sales increased and construction jobs jumped. But perhaps one of the most significant repercussions of the industry’s collapse has been that housing hasn’t been available to play its traditional role in the recovery.

That appears to be turning. Sales of new single-family houses in May rose 7.6% compared with April and 19.8% from May 2011, the Commerce Department reported Monday. The seasonally adjusted annual rate of sales was 369,000 last month, the highest level since April 2010, when a federal tax incentive for buyers that had been juicing the market expired, sending sales and prices into a renewed decline.

“This is the first time I have heard any kind of pulse in the home building business in the last five years, and I think it is legitimate,” said Stuart Hoffman, chief economist for PNC Financial Services Group. “The housing market will be a source of strength to the economy for the first time in years.”

Last year, new home sales were so weak they set a record for the most dismal performance on the books. Sales have now rebounded 35% since hitting a low in February 2011. The widely read economics blog Calculated Risk has argued for months that a recovery in housing is underway.

“It might be hard to believe, but earlier this year there was a debate on whether housing had bottomed,” the blog’s chief author, Bill McBride, wrote Monday, following the release of the new home sales statistics. “That debate is over — clearly new home sales have bottomed — and the debate is now about the strength of the recovery.”

New home sales statistics are often unreliable, and many economists caution about placing too much weight on one month’s report. IHS Global Insight economists Patrick Newport and Michele Valverde wrote in an analysis that a three-month moving average of new home sales data shows the numbers are “inching up nationally.”

Real estate investment has contributed to economic growth, albeit meagerly, for the last four quarters, according to real gross domestic product data from the Commerce Department’s Bureau of Economic Analysis. With the steady rate of improvement in sales, housing will probably continue to be a moderate boost to the shaky economic recovery rather than a drag.

Although sales of newly built homes account for only a slice of the overall housing market, economists keep a close watch on them to get a read on consumer sentiment and job creation, particularly in the construction industry.

The new data add another layer to the ongoing debate over the strength of the recovery. Last week, research showed builders breaking ground on fewer homes in May but requesting the most permits in nearly four years. Home-builder confidence is still weak but home prices are turning around. Mortgage rates are at record lows.

Michael D. Larson, a housing and interest rate analyst for Weiss Research, said he was skeptical that recent improvements in housing data would translate into a strong rebound. The turnaround, Larson said, probably reflects low interest rates making housing relatively affordable and increased confidence following the moderate jobs recovery this year. Those steps forward could be easily threatened by another economic downturn or even sluggish growth, he said.

“The question is whether we are going to be able to sustain this,” Larson said. “You have to be a little concerned about the economy.”

The housing market this year has been squeezed by tight supply, helping stabilize prices. The data on new home sales released Monday showed inventory of new homes rising for the first time in more than a year, to 145,000. That works out to about 4.7 months of supply, well below the six months that economists consider a healthy inventory.

The median sales price of new houses also improved last month, up 5.6% from the same month last year, to $234,500. That median price was also substantially higher than May’s $182,900 median sales price for previously owned homes, as published by the National Assn. of Realtors.

“The implication appears to be that Americans are becoming more willing to splash out on the extra cost of a new home,” Paul Diggle, an economist with Capital Economics, wrote in a report.

Christopher Low, chief economist for FTN Financial, said the recovery for new home sales and construction remains isolated to regions where there was no major boom during the go-go years. The suburbs of cities such as New York, Los Angeles and Chicago continue to see little growth.

“We are seeing quite a bit of demand in housing in North Dakota, Montana and Pennsylvania, where thousands of new oil and gas industry jobs have been created,” Low said. “We are seeing demand in part of the old industrial Midwest, in Ohio and Michigan, outside of Detroit, where manufacturing jobs are making a comeback.”

Throughout Southern California, sales of newly built homes and condominiums have improved slightly over the last year, according to real estate research firm DataQuick of San Diego. Sales increased 5.5% in May from the same month last year, and the median price rose 3.2% to $373,000.