New-home sales hit 2-year high

October 24, 2012: 11:08 AM ET
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New home sales hit a two-year high in September.
NEW YORK (CNNMoney)

In another sign of a housing market recovery, new-home sales rose in September to the highest level in more than two years, according to a government report released Wednesday.

Sales sold at an annual rate of 389,000 homes in the month, according to the Census Bureau report, up 5.7% from the 368,000 sales pace in August. The last time sales were at this pace, in April 2010, they were being helped by a short-term home buyer's tax credit.

How to Spot a Recovering Market
If key local sales indicators beat the U.S. averages (as they do in the areas below), your market is probably picking up -- and prices will soon follow.
Metro Area Percentage With Drop In List Price Days Listed On Zillow Sale-to-List Price Ratio
San Jose 16.5% 51 1.01
Cheyenne, Wyo. 21.7% 88 1.08
Clarksville, Tenn. 30.6% 103 0.98
National Average 30.7% 113 0.97
NOTE: Zillow, based on June 2012 data.

This time, the new home market has been showing steady signs of improvement. The pace of home building hit a four-year high in September, according to a separate government report. The year-over-year sales improvement in September reached 27.1%.

The improvement in the market is part of a broader recovery in real estate, helped by a number of factors all coming together.

Mortgage rates are near record lows, pushed down by the Federal Reserve's decision to buy $40 billion in mortgages to spur greater economic growth. The low rates, coupled with years of weak home sales, have resulted in affordable housing prices. Recently, home prices have started to rise, which is attracting buyers who were waiting for prices to bottom out.

There has also been a drop in unemployment, a positive development for people looking for mortgage loans.

Foreclosures have fallen to a five-year low, reducing the supply of distressed homes available on the market.

Related: A new housing boom

"All the housing data has taken a turn for the better," said Steven Ricchiuto, chief economist for MSUSA. "Clearly mortgage rates at such a low level and what appears to be an increase in banks' willingness to make loans has boosted activity off the lows."

New-home sales are an important component of the nation's overall economic activity. Not only do they require people working in construction to build the homes, but they also spur the purchases of appliances, carpeting and other furnishings.

Investment guru Warren Buffett said in a television interview Wednesday that the recent recovery in housing is one of the factors making him more optimistic about the U.S. economy.

Related: Is buying rental property now a sure bet?

The median price of a new home sold during the month was $242,400, down 3.2% from the August reading but up 11.7% from a year earlier. The slight decline in the month-over-month price reading was partly due to most of the increased sales coming from the South, a region that has lower prices on average.

Housing market rebound ... finally!

The upward pressure on prices over the last year has been helped by the tight supply of new homes on the market. The report showed inventories fell to 4.5 months, the tightest supply of homes since August 2005, near the height of the housing bubble.

Related: Housing is indeed heading higher

The actual number of homes available for sale was little changed, with the tighter supply coming from the stronger sales pace.

"Home builders had previously been content to cut the pace of starts back dramatically and well below the pace of sales, thereby letting the level of new-home inventory decline," said Michael Gapen, economist with Barclays Capital. "That inventory levels have stabilized... suggests that home builders are becoming more comfortable carrying these inventory levels."

Still the pace of new-home sales is still far below the levels seen during the housing bubble of the last decade, when they topped 1 million every year between 2003 and 2006. And Ricchiuto said it'll take a much stronger labor market before he's convinced that housing has turned the corner.

"We have seen false starts before," he said.

Still the report lifted the stocks of many leading home builders, with DR Horton (DHI), KB Home (KBH) and Toll Brothers (TOL), PulteGroup (PHM) and Lennar (LEN) all rising more than 1% in morning trading. All five of those stocks are up between 70% to 178% so far this year.


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