The Wall Street Journal

26 August  2012

Sales of newly built homes rose briskly in July, and inventory fell to the lowest level on record, suggesting the housing market is showing continued signs of recovery and that builders may need to ramp up construction in the coming months.

The Census Bureau said Thursday builders sold a seasonally adjusted annual rate of 372,000 homes in July, up 26% from the same month last year. Inventory of new homes available for sale fell to 142,000 units, the lowest level recorded since the government started tracking the figure in 1963.

Economists were encouraged by the report. As home builders continue to deplete their inventories, they will “start construction on more new homes, and that’s when construction will start to add to the economy,” said Mark Vitner, senior economist with Wells Fargo Securities.

A separate report Thursday by the Federal Housing Finance Administration, which regulates mortgage companies Fannie Mae and Freddie Mac, showed prices of previously owned homes rose 1.8% in the second quarter from the first—the biggest quarterly jump in more than six years.

Both reports, combined with a recent spate of strong earnings reports from publicly traded home-building companies, are more evidence that the housing market is showing renewed signs of life.

The rise in new-home sales partly reflects low stocks of existing, or previously owned, homes. On Wednesday, the National Association of Realtors reported that inventory levels for existing homes fell to a 6.4-month supply in July, from a 9.3-month supply a year earlier.

With so little available in the existing-home market, a growing number of buyers are choosing new homes, to the point where “new home sales growth is outpacing growth in traditional existing sales,” says Ivy Zelman, an independent housing analyst who turned bullish on the home-building sector last year.

Potential buyers are “frustrated” with the existing-home market, says Scott Koppendrayer, director of sales for LDK Homes, a high-end custom builder based in St. Michael, Minn. “The stuff that’s left, it’s not the nice stuff.”

Unlike existing homes, builders are holding the line on prices of new homes. According to the Census Bureau, the median price for a new home sold in July was $224,200, down from $229,900 in July a year ago.

Douglas Yearley, chief executive of Toll Brothers Inc., the nation’s largest builder of large luxury homes, said his company is cautious about raising prices, because it still worries about driving away skittish consumers.

“We’re still scared,” he said in a conference call with analysts Wednesday. Still, Toll reported strong quarterly earnings Wednesday, with income rising 46% and orders for new homes surging 57% compared with a year earlier. Toll’s numbers come on the heels of strong quarterly results for other big public builders, including D.R. Horton Inc., Corp. MTH, and PulteGroup Inc.

Ian Pickering, a 40-year-old information technology director for a defense contractor, said he and his wife had looked at seven previously owned homes, all in the $200,000-to-$400,000 price range, in the last three weeks but were unhappy with the selection. “For the square footage we wanted, there was really nothing on the market,” he said.

The Pickering family finally decided to look at a new home built by Ryland Homes, a large national builder. On Wednesday, the family closed on the purchase of four-bedroom, three-bath ranch house with a three-car garage in Lake Nona, outside of Orlando, Fla., for $335,000.