New home sales bounce back 5.4 percent in July

New home sales rose to a 507,000 annualized pace last month, according to data released Tuesday by the US Commerce Department. 

Following two months of declines, new home sales are back on the rise. The Commerce Department said Tuesday that new home sales rose 5.4 percent  to a seasonally adjusted annual rate of 507,000 in July. Although economists expected the pace to be closer to 510,000, last month's number still shows growth, indicating a continued recovery of the housing market and a strengthening economy.

New home sales account for a small sliver of the housing market just eight percent - but they are viewed with interest because they reveal trends often relevant to the wider housing market. This month’s increase in new home sales coincides with an upbeat initial consumer confidence data for August. After taking a big step back in July, the Conference Board's consumer confidence index rose 10.5 points in August to 101.5, its highest reading since January.

The monthly data is not known for complete accuracy and the numbers can be volatile month to month because of the measure's relatively small sample size," IHS Global Insight economists Patrick Newport and Kristin Reynolds write in an e-mailed report. New home sales figures have been revised down by 12,000 homes over the past three months, and many experts advise a margin of error of 14.8 percentage points. That margin might undermine the significance of the jump in new home sales from June to July, which was the largest jump of the year. Still, confidence can be placed in the recovering housing market based on the yearly numbers, as July 2015 is 25.8 percent above the July 2014 rate of 403,000.

However, experts warn that both consumer confidence and new home sales growth face obstacles in the coming months. "Inventory is expanding relative to year-ago levels in each region of the country, particularly in the Northeast," Ms, Reynolds and Mr. Newport write. "But new home inventory is still relatively tight, especially relative to existing single-family home inventory. As of July, there were 8.5 existing single-family homes for sale for every new home, an improvement from May’s ratio of 9.3, but shy of the 1990s, when this ratio averaged 6.3. The housing market still has a long way to go."

Consumer confidence could be negatively affected in September by recent turmoil in global financial markets. July's numbers took a hit thanks to troubles in China and Greece, showing that  "consumer confidence can react very strongly to stock market volatility and headline effects from China," writes IHS Global Insight chief US economist Chris Christopher in an e-mailed report. "But, if the US stock markets stabilizes and if the financial news from China calms down, then US consumer confidence can bounce back on fundamentals – lower energy prices, well received employment reports, a housing market that is gaining traction, and modest consumer price inflation."

Home prices, meanwhile, slipped for the second straight month in June but continued their steady year-over-year climb. According to a separate report released Tuesday, prices on Case-Shiller's 10 and 20-city indices have risen 4.6 percent and five percent, respectively, since June 2014. The biggest year-over-year price increase was in Denver, which has seen prices rise 10.5 percent since June of last year. The city with the slowest yearly price growth was Chicago, up just 1.4 percent year-over-year.