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Housing Market Benefits From Surge In New Home Sales

Written by Than Merrill

According to data recently released by the Commerce Department in Washington, new home sales increased 18.6 percent over the previous month in May. The latest numbers, which now sit at an annualized pace of 504,000, indicate the largest one-month jump in home sales since January 1992. The Commerce Department data was supplemented by another report that acknowledged household sentiment had climbed to its highest point since the early days of the recession. This month marks the most confidence people have had in the housing market for approximately six years, and numbers are finally indicative of the trend.

Contributing to the recent rise in sentiment, are multiple indicators that serve as encouraging signs that the economy is on an upward trajectory. Nearly all of the jobs that were lost as a result of the downturn have been recouped and payroll gains have exceeded 200,000 workers for four consecutive months. Moreover, stable borrowing costs are at historically low levels, allowing prospective homeowners to once again participate in the housing market. These factors, and many more just like them, have stimulated the economy. As a result, new home sales have seen a dramatic increase.

“Confidence is percolating up through the economy, making people reach for big purchases like new homes,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who had forecast gains in consumer confidence and new home sales. “The risks to the outlook seem to be diminishing.”

In lieu of growing confidence, more new homes were sold last month than in any month since May 2008. The resulting sales numbers surpassed all 74 forecasts established by Bloomberg to survey the economic conditions of the housing sector. If those facts aren’t encouraging enough, the median estimate called for an annualized pace of 439,000 – that is 65,000 fewer new home sales than what expectations are currently at.

All four regions of the United States were beneficiaries of the recent increase in new home sales, but the Northeast lead the charge with a jump of 54.5 percent over the previous month.

“Housing is beginning to revive,” said Stephanie Karol, an economist at IHS Global Insight, and the top forecaster of new home sales in the past two years, according to data compiled by Bloomberg. “It’s a step in the right direction. The job market is helping, and there was an expansion of supply the past couple of months.”

The revival of new home sales, in association with summer selling months, has allowed builders to break ground on new projects. April and May represent the best two-month period builders have experienced since late last year.

Home prices in 20 U.S. cities rose at a pace that was slower than expected. According to the S&P/Case-Shiller index, property values increased 10.8 percent from April 2013, the smallest 12-month gain in more than a year, after rising 12.4 percent in March. The current trajectory suggests that affordability will remain in tact and the recovery may proceed without leaving first-time buyers behind.

Of particular importance to first-time buyers, are mortgage rates that remain historically low. According to Lawrence Yun, the chief economist for the National Association of Realtors (NAR), the slump in sales that began about a year ago when mortgage rates shot up “is pretty effectively over.” Given gains in employment, it is “hard to foresee how sales could slide back now.” He projected sales will soon top the 5 million pace and stay around those levels for the rest of the year.