July 26, 2010 / 2:05 PM / 10 years ago

Home sales surge in June with inventory at 42-year low

WASHINGTON (Reuters) - Sales of new homes rebounded strongly in June from May’s record low, pushing the number of houses on the market to the lowest level in nearly 42 years.

Construction worker Trent Gardner carries a column for a new home in Matthews, North Carolina, April 15, 2010. REUTERS/Chris Keane/Files

But downward revisions to sales estimates for April and May in Monday’s report left in place a picture of a weak housing market and perceptions that economic growth moderated somewhat in the second quarter.

Sales of new single-family homes vaulted 23.6 percent to a 330,000 unit annual rate, the Commerce Department said. Still, the sales pace last month was the second lowest since records started in 1963.

“We can’t take too much joy in one month’s figure. The roadblocks to a healthy housing market are high, the most important one being the still high jobless rate,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

The percentage increase last month was the largest since May 1980, and it partially unwound May’s historic 36.7 percent drop as the U.S. housing market was roiled by the expiry of a popular tax credit that boosted sales. Analysts polled by Reuters had forecast new home sales rising to a 320,000-unit pace last month from May’s previously reported 300,000 units.

New home sales account for only a fraction of the total U.S. housing market.

The report, together with package delivery and business services company FedEx Corp’s upgrading of its quarterly and full-year earnings forecasts, prompted a rally on Wall Street.

Each of the three major U.S. stock indexes gained 1 percent for the day, with the Standard & Poor’s 500 at 1,115.01 — just a fraction of a point shy of the break-even point for the year. The Dow Jones industrial average is back in the black for the year. The Nasdaq, which edged back into positive territory for the year on Friday, is now up 1.2 percent for 2010 so far.

Safe-haven U.S. government debt eked out slim gains, while the dollar fell broadly.

FedEx, regarded as an economic bellwether, said more packages were flowing through both its air and ground networks.

Recent data have implied the U.S. economy’s recovery from its longest and deepest recession since the 1930s slowed in recent months, but economists do not expect a renewed downturn.

Ford Motor Co Chief Executive Alan Mulally said he agreed, telling NBC’s “Today” show: “I think that we’re going to have good, steady growth here.”

ACTIVITY SLOWING DOWN

The government is expected to report on Friday that growth in gross domestic product slowed to a 2.5 percent annual rate in the April-June period from a 2.7 percent pace in the first three months of the year.

Moderation in growth was signaled by a measure of national economic activity released on Monday. The Chicago Federal Reserve Bank said its national activity index fell in June for the first time since February, dropping to minus 0.63 from a positive 0.31 in May. A reading above zero indicates the economy is growing above trend.

Separately, a gauge of factory activity in the Texas region extended its decline this month, suggesting a pullback in manufacturing continued in July.

Manufacturing has been the main engine of growth.

While economists expect weak housing activity to act as a drag on growth for much of the year, they do not believe this would be enough on its own to trigger a double-dip recession.

“It’s not going to affect the economy that much. It’s more the economy affecting the housing market. What we need is for the economy to start creating jobs,” said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.

Data last week showed home construction fell to an eight-month low in June, while sales of existing home were the lowest in three months.

Housing’s share of the economy has shrunk in recent years and residential construction accounted for about 2.4 percent of U.S. gross domestic product in the first quarter.

The impact of a 10 percent drop in home construction has about one-third the impact now as it did in 2006, according to economists at Bank of America-Merrill Lynch.

The Commerce report suggested the housing market may be close to working through the distortions following the end of a popular home-buyer tax credit in April, an incentive that brought forward sales.

Last month’s surge in sales saw the supply of new homes available for sale dropping to 7.6 months’ worth from 9.6 months’ worth in May. The number of new homes on the market dropped 1.4 percent to 210,000 units, the lowest level since September 1968.

“Progress is being made in reducing the excess inventory, which is crucial for the outlook for prices,” said Paul Dales, a U.S. economist at Capital Economics in Toronto.

“However, new home sales make up just 5 percent of all sales. And the post-tax credit fall-off in activity has yet to fully show up in existing sales. Total home sales have, therefore, yet to hit rock bottom.”

The median sale price for a new home fell 1.4 percent last month to $213,400. In the 12 months to June, prices dipped 0.6 percent, the smallest drop since November 1987.

House price have stabilized on a year-ago basis.

The Standard & Poor’s/Case-Shiller 20-city home price index likely increased 4.0 percent year-over-year in May following a 3.8 percent rise in April, according to a Reuters survey. The report is due on Tuesday.

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For a graphic on June sales of new U.S. homes see:

link.reuters.com/fyt59m

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Editing by Jan Paschal

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