New-home sales steady, but prices jump

September 26, 2012: 11:27 AM ET
New home sales
New-home sales stayed strong in August even as prices jumped due to tight supplies on the market.
NEW YORK (CNNMoney)

Sales of new homes were little changed in August, but prices rose sharply in a signal of continued improvement in the housing market, according to a government report issued Wednesday.

New homes sold at an annual rate of 373,000, down 1,000 from the July reading from the Census Bureau, which tracks the sales. The number is 28% above year-earlier levels.

But the median price of a new home jumped 11% from the July reading to $256,900. While month-to-month readings can be volatile, the latest reading lifted the year-over-year improvement in sales price to 17%.

The prices are helped by a number of factors, including a tight supply in new homes available on the market. Census estimates there is now only a 4.5 month supply of new homes on the market, unchanged from July but down from 6.6 months at the same time last year. The tight supply is partially attributed to 2009 through 2011 being the three slowest years of housing construction on record.

"Even though this report did not show a significant headline increase, the persistent low levels of inventories and increasing prices are encouraging signs and in line with our view of a broader housing recovery," said Cooper Howes, an economist with Barclays Research.

There have been numerous signs of a turnaround in the housing market in recent months, including broad improvement in home prices, new housing construction and the sale of pre-owned homes. The pace of home foreclosures, which had been hanging over the market driving down prices, is also down from year-earlier levels. And record low mortgage rates are helping to lower the cost of home ownership.

Part of the reason for the jump in median price could be because of a geographic mix. Sales in the Northeast, typically a more expensive market, rose by 20%, while sales in the more affordable South slipped by 5%.

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David Crowe, chief economist with the National Association of Home Builders, said he believes the increase is also due to more demand for bigger homes. He points out that there is was an increase in the number of homes sold costing $500,000 or more.

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"I think it's more of who's buying -- the trade-up buyers are a bigger share of the market," he said. "They're the ones with jobs and equity and sufficient credit scores."

New-home sales are an important lift to the overall economy. Beyond the construction jobs needed to build a new home, a new-home sale can create more demand for appliances and other big-ticket purchases than the sale of an existing home. The new-home sales report is also a more forward-looking economic reading, since it tracks when contracts are signed to buy a new home, not when the home sale is closed, which can take place months later. The report on sale of existing homes tracks when the home sales are closed.

While the current pace of sales is far above the 306,000 new homes sold in 2011, it's still well below the pace of sales during the housing bubble of the last decade, when more than 1 million new homes were sold every year from 2003 through 2006. Even in the five years before that bubble, there were about 900,000 new homes sold on average every year.


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