New home sales post surprise gain

NEW YORK (CNNMoney.com) -- New home sales posted an unexpected gain in July, according to a government report Friday - a rare ray of good news in the stormy housing market. But economists warn the glint of sunshine is likely to be short-lived.

New home sales rose 2.8 percent to an annual rate of 870,000 from a revised 846,000 rate in June, the Commerce Department reported. Economists had been looking for sales to fall to a rate of about 825,000, a level that would have been a seven-year low.

New home sales posted a surprise gain in July, but economists still see more problems ahead for the market.

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Even with the unexpected rise, the pace of sales only looked good by comparison to very weak sales seen so far this year. The pace of sales is still off 10.2 percent from year-ago levels, and the July sales pace would have been lower than any monthly reading seen from October 2001 through January of this year.

Much of the increase came in the West, which saw sales jump 22 percent from June. The South posted only a 0.6 percent rise, while the Midwest and Northeast continued to see new home sales fall. All four regions have sales well below year-earlier levels.

Economists said that problems in the secondary market for mortgages seen in August, which has made subprime mortgages and the so-called jumbo mortgages more difficult to come by, will hit results going forward.

"We were in a slightly stronger position going into this latest hurt than we thought we were. That's the good news," said Bill Hampel, chief economist for the Credit Union National Association. "But this is probably the last bit of good news we'll get from this market for a long time."

Builders, worried about a big glut of unsold homes on the market, cut prices - a strategy that apparently worked. The average price of a new home sold in the period fell to $300,400, down 3.4 percent from a year ago.

While the median price edged up 0.6 percent to $239,500 from a year earlier, it's still off 8.8 percent from the record high hit just last March. The July 2007 median is also below the full-year reading for 2005 and 2006.

Prices have been hurt by a large supply of homes on the market, but the latest report started to show some progress whittling away at that glut.

The government estimated there was a 7.5 month supply of homes in June, but that slipped to a 6-month supply in the latest reading. Meanwhile, the average time that a completed home sat on the market edged higher in the latest report to 6.1 months from 5.9 in June.

"I suspect builders were pulling out all the stops to get those homes sold, and they at least had a little success," said Stuart Hoffman, chief economist for PNC Financial Services Group. "But given what's happened with the mortgage market since, it's clearly going to be materially worse in August than it was in June and July. We're not anywhere near the bottom for sales or prices. It's probably 6 to 9 months out ahead of us before we hit bottom."

The report's price readings probably don't capture all the downward pressure on prices. In the latest survey by the National Association of Home Builders, about three-quarters of builders reported offering extras, such as paying for closing costs or adding features for free to boost demand. The same survey found builders' confidence in the housing market at a 16-year low.

The downturn in new home sales and prices have hammered the earnings of the nation's largest builders.

While luxury home builder Toll Brothers (Charts, Fortune 500) managed to report a narrow profit this week that topped forecasts of a loss, it still saw earnings fall 85 percent from year-earlier levels. And the six publicly traded builders who are larger than Toll have all reported losses recently.

Lennar (Charts, Fortune 500), the nation's No. 1 builder, and No. 5 KB Home (Charts, Fortune 500) both reported a loss in the latest quarter. No. 2 home builder D.R. Horton (Charts, Fortune 500) and No. 3 Centex (Charts, Fortune 500) both reported losses far bigger than Wall Street had expected, while No. 6 Pulte Homes (Charts, Fortune 500) and Hovnanian Enterprises (Charts, Fortune 500) have reported losses for the last two quarters and analysts project losses for at least the next year.