New home sales climb 1.5 percent, bolstering housing recovery

New home sales improved again in March. Despite a minor slowdown in existing home sales, analysts are optimistic that the US housing recovery is continuing and that home prices will rise. 

The US housing sector is powering ahead. Despite small dips in the road, the market is expected to see further recovery and rising home prices for the rest of the year.

The latest evidence: new home sales. They rose 1.5 percent in March to 417,000 homes, up from 410,000 new homes in February, according to Commerce Department data released Tuesday. Sales were up 18.5 percent from March 2012.

“Trends in new home sales remain consistent with a broad-based recovery in US housing,” Barclays researcher Michael Gapen wrote in an e-mailed analysis. “We look for lean inventories of both new and existing homes to support homebuilder activity and house prices in the coming quarters.”

What's less clear is whether the number of home sales will accelerate. In contrast to new home sales, existing home sales slipped 0.6 percent between February and March, meaning the market is on pace to sell 4.92 million home on the year, according to the Washington-based National Association of Realtors (NAR). 

Many analysts doubt that housing is slowing down. Michael Montgomery and Stephanie Karol, economists from IHS Global Insight, called the March slowdown “minor” in their written analysis. Existing home sales are up 10.3 percent from a year ago, and prices are steadily increasing. The median sales price for a new home was $247,000 last month, up 3 percent from a year ago.

The NAR blamed the slowdown on tight inventory of available homes for sale, but the inventory question remains tricky.

By historical standards, the market of available homes is tight: 4.7 months’ supply, according to NAR data, versus a more normal six or seven months’ supply. But the supply of existing homes for sale has actually been increasing this year. In January, the supply was 4.3 months.

A few factors account for the shortage. Potential sellers are clinging to their homes, either because they are waiting for the market to improve or they simply can’t afford to list. By the end of 2012, more than 10.4 million homeowners had underwater mortgages, which meant they owed more on their mortgage than their home was worth. In certain states, a drawn out foreclosure process has kept distressed homes from being released to the market. In states like Florida and Illinois, that could mean more available homes in the coming months.

“The percentage of distressed transactions fell to 21 percent in March, whereas this percentage had been fluctuating several percentage points higher in recent months” in existing-home sales, Mr. Gapen at Barclays wrote.  

How quickly this “shadow inventory” comes onto the market will determine the pace of future sales and also, quite possibly, the speed of the rise in home prices.

“Lean inventory levels, however, are likely supporting home price appreciation,” Gapen added. “We expect home prices to rise another 6-7 percent in 2013 as low inventory and gradually improving housing demand are expected to offset a sizable fiscal drag and tight credit conditions in mortgage markets.”