New home sales fall. But are you ready for housing recovery?

New home sales and existing home sales dipped last month and prices continue to fall. But the slump is sowing the seeds of its own housing recovery.

Sales down. A huge shadow inventory. A double-dip in prices.

It’s hard to find anything encouraging to say about today's housing sector. But slumps have a way of sowing the seeds of their own recovery. And this one is no different.

Start with supply. The Census Bureau reported Thursday that sales of new single-family homes fell 2.1 percent in May. That’s bad. But the same data show that the inventory of new homes fell to a record low – and the records go back to 1963.

Builders aren’t building because there’s a glut of existing homes for sale or working their way toward foreclosure or held off the market by reluctant sellers. It could take quite a while to work off that inventory.

But the gears of a housing recovery are already grinding through that excess. For example, the crash in housing has made borrowers and lenders much more diligent and far less likely to overextend themselves. As a result, fewer mortgages are going delinquent, which means today's overfull pipeline of foreclosures will begin to shrink.

Now look at demand. With home prices falling and the economic future still uncertain, many people are delaying home purchases and choosing to rent instead. The rate of home ownership may actually fall below historic norms, according to Monitor columnist Gary Shilling, which could mean home prices fall another 20 percent.

That’s no good, either, in the short run. But the more prices decline, the better deal homeownership becomes. Housing is already the most affordable it’s been in 40 years, according to the National Realtors Association in Washington.

And the longer that people put off buying homes, the more the pent-up demand for them. Household formation – which happens when young singles or couples strike out on their own – has also seriously lagged overall population growth. (Click here for a nice chart from The Atlantic.) At some point, those young people and couples will quit living with parents and friends and want a place of their own.

“Housing is extremely affordable in the US and household formation is very, very low,” says Nariman Behravesh, chief economist of HIS Global Insight in Lexington, Mass. “There's a huge pent-up demand. So the only issue for us is not if it gets released but when it gets released.”

No one pretends that that will be tomorrow. Even next year could be a stretch. But as surely as night follows day, a housing glut will be replaced by a shortage – or at least the perception of one, which will drive the market into a new and sunnier direction.