New Home Sales in May – More Progress

Today’s joint release from the US Census Bureau and the US Department of Housing and Urban Development reports that newly constructed single family homes sold at a seasonally adjusted annual rate of 476,000 in May. This is a 2.1% increase from the pace in April and represents steady progress from the housing bust lows, but sales remain at historic lows and the pace of recovery in single family new construction lags sales of existing units.

The inventory of new homes for sale edged up to 161,000 from 157,000 in April, but this level of inventory is still historically low and represents roughly one-third of the units sold, well below the more normal inventory level of half of units sold. This low level of inventory reflects builder caution as well as ongoing headwinds restraining higher levels of production and sales, including shortages of lots and skilled labor, and access to credit on both the builder and buyer sides.

Improving demand and limited supply have been pushing prices higher. The median sales price in May was $263,900, down from April but up from year ago levels. Prices for new homes have now largely regained the losses from the housing bust.

Rising prices for both new and existing homes is a net positive for the housing recovery. Recovering prices will improve conditions for builders, lead to higher inventories of new construction, as well as motivate potential sellers of existing homes to come back into the market. The sale of an existing home is typically a pre-condition for buying a new home. Inventories of both new and existing homes have been inching up in recent months as confidence in the housing recovery builds.

We expect this improvement to continue with new home sales passing 500,000 by the end of this year and reaching 700,000 by the end of 2014.