June 25, 2012 / 2:06 PM / 5 years ago

New home sales race to two-year high in May

WASHINGTON (Reuters) - New single-family home sales surged in May to a two-year high and prices rose from a year ago, further signs the housing market recovery was gaining some momentum.

An existing single family home which is up for sale is pictured in Burbank, California December 15, 2011. REUTERS/Fred Prouser

The Commerce Department said on Monday sales jumped 7.6 percent last month to a seasonally adjusted 369,000-unit annual rate, the highest since April 2010.

That was well above economists’ expectations for a 346,000 pace and the highest since April 2010, when sales were inflated by a homebuyer tax credit.

The report was the latest evidence of a broadening recovery in the housing market even as the economy is weakening. The sector had long been the Achilles heel of the economy’s recovery from the 2007-09 recession.

“The housing market recovery remains on track. While we still have a long ways to go, healing is taking place and we are starting to see improvement,” said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Reports last week showed a jump in home building permits and a fourth straight month of gains in the median price of previously owned homes.

Underscoring the firming tone, new home sales in May were up 19.8 percent from their year-ago level.

Still, they stand at only a quarter of the peak reached in July 2005 and the sector remains constrained by an oversupply of previously owned homes.

“The level of new home sales in May was still quite depressed but the combination of more affordable prices and ultra-low mortgage rates appears to be supporting a decent rise off the bottom for housing demand,” said Michael Feroli, an economist at JPMorgan in New York.

Residential construction is expected to contribute to gross domestic product this year for the first time since 2005. But there are fears that foreclosures, which are rising again after a brief lull, could erode demand for new houses. New home sales account for only 7.5 percent of the overall market.

BUILDERS RUNNING A TIGHT SHIP

The data did little to support shares of U.S. homebuilders, which were sharply lower on Monday along with the broader stock market.

In the face of the foreclosure wave, builders are carefully managing their stocks, which is helping to lift new home prices off the bottom. The median price of a new home rose 5.6 percent in May from a year ago to $234,500.

While the inventory of new homes on the market edged up 0.7 percent to 145,000 units last month, it remained near record lows.

“There is very little speculation in residential real estate. Houses are being built and sold only in the few places where there is clear demand,” said Chris Low, chief economist at FTN Financial in New York. “As a result, sales are likely to continue to improve some time to come.”

At May’s sales pace it would take 4.7 months to clear the houses from the market, the lowest since October 2005 and down from 5.0 months in April.

New home sales last month were buoyed by a 36.7 percent jump in the Northeast to the highest level since July 2009, and a 12.7 percent rise in the South to a two-year high. Sales in the West fell 3.5 percent and were down 10.6 percent in the Midwest.

Reporting by Lucia Mutikani; Editing by Andrea Ricci, Dave Zimmerman

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