New home sales: Back from the dead?

New home sales rise more than expected, and prices post gains despite continued rise in completed new homes on the market.

By Chris Isidore, senior writer

NEW YORK ( -- Homebuilding, one of the most battered sectors of the U.S. economy in recent months, showed surprising strength in November, according to a government report Wednesday.

New homes sold at an annual pace of 1.05 million, up from the revised annual rate of 1.01 million in October. Economists surveyed by had forecast that home sales would rebound to a 1.02 million pace.

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The median average home price came in at $251,700 in November, up from the $248,500 level in October. The median price, that is, the point at which half the homes sell for more and half sell for less, had shown declines earlier in the fall because of a glut of homes available for sale on the market.

The supply of completed new homes available for sale continued to creep up, setting yet another record at 169,000. But all new homes available for sale, which includes those with permits but not yet started as well as those under construction, was slightly lower. That took the inventory of new homes on the market down to an estimated 6.3 months' supply in November, compared to 6.7 months in October and 7.2 months in July, when new home sales slowed to a crawl.

The median price is now back to the second-highest level on record, trailing only the $257,000 level reached in April of this year.

And while the pace of home sales is down 15.3 percent from the white-hot sales rate of a year ago, it's up nearly 7 percent from the trough hit in July of this year, when revised figures put the annual sales pace at just below a million.

The pace of sales in November would have been a record high as recently as December 2002, before the building boom seen in 2003 through 2005.

Still, John Tomlinson, an analyst with Majestic Research who covers the major publicly traded builders, said the government report is missing some signs of weakness in the new home market, including orders for new homes that are cancelled by buyers or incentives offered by builders, such as covering closing costs or extra features on the homes for free, in order to support sales in the weak market.

"I'm not so sure that the pricing has bottomed here," Tomlinson said. "There's still a ton of inventory on the market. When inventory comes more in line with demand, we'll be ready to see an upturn."

David Seiders, the chief economist with the National Association of Home Builders, agreed that the supply of homes on the market is still too high to say that the report signaled a recovery, yet he's encouraged by the solid sales pace in this report.

"What I've been looking for is stabilization, that's what I'm reading from this," he said.

Seiders said he didn't put much stock in the reported increase in prices, saying that was influenced by a big month-over-month jump in sales in the Northeast and West, the two high-priced regions of the nation, and a 9 percent drop in sales in the South, a lower-priced region that accounts for more than half of new home sales, even in this weak month for sales there.

"Everything we're hearing from builders - big, small - nothing points to price increases," he said. A survey of members by his trade group in November found the 48 percent had reduced prices in order to maintain sales, while 59 percent had offered free extras on the homes.

The slowdown in homebuilding has been a significant drag on the U.S. economy in recent months. The latest reading on gross domestic product, the broad measure of the nation's economic activity, estimated that investment in residential property subtracted 1.2 percentage points from the overall growth rate in the third quarter.

But Wednesday's report and some other readings on real estate suggest that perhaps the homebuilding market has found a bottom, helped by continued low unemployment rates and historically low mortgage rates. Mortgage financing firm Freddie Mac has shown the average 30-year fixed-rate mortgage to be about 6.1 percent in December, down from the four-year high of 6.8 percent reached in early July.

The slump in homebuilding and new home prices has hit the results of most of the nation's leading homebuilders. In the last few months, Pulte Homes (Charts), Lennar (Charts), Centex (Charts) and Toll Brothers (Charts) have all given earnings guidance below consensus forecasts, and analysts are forecasting continued earnings declines at KB Home (Charts) and D.R. Horton (Charts).

The shares of all those stocks posted solid gains in late-morning trading on the new home sales report.

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