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New home sales accelerate and inventories are low, good for homebuilders

May new home sales, as reported by the Census Bureau and the Department of Housing and Urban Development, increased 2.1% from April

New home sales increased to an annualized pace of 497,000—up 8.3% from May (which was revised down from an initial estimate of 476,000 to 459,000) and up 38% from a year ago. Activity picked up in the West, South, and Northeast, while falling in the Midwest.

New Home Sales 1 yearEnlarge Graph

Restricted supply has been the theme of the U.S. housing market over the past year

At the end of May, there were 161,000 new homes for sale, representing a 3.9-month supply. The median time a new home has been on the market has shrunk from nine months last summer to the current figure of five months. As professional investors have become major players in the real estate market, we’re seeing bidding wars for properties in the hardest-hit markets, like Phoenix, and even strong markets, like Washington, DC.  For all the fears that a flood of properties would hit the market and drive down prices, the opposite problem has happened.

Prices are beginning to rise

The median sale price for a new home was $249,700, and the average price was $295,000. These numbers aren’t based on a repeat sales methodology, so you can’t project nationwide existing home prices from these figures. On balance, the jump in prices implies that more activity is happening at the high price points. That said, the report showed that the sweet spot for new home sales has been in the $200,000-to-$299,000 range. Transactions in the sub-$150,000 category fell.

Homebuilder earnings were strong

Homebuilders reported first quarter earnings last month, and overall, the reports were quite good. Reports noted particular strength in the West Coast, and also in the entry-level and first-time move-up sector. KB Homes (KBH) and Lennar (LEN) had strong quarters. NVR had a weaker quarter due to its primarily East Coast focus, but it still showed strong growth. We’ll be hearing from D.R. Horton (DHI), Standard Pacific (SPF), and PulteGroup (PHM) shortly. It appears that the first-time homebuyer might be returning to the market at long last. Certainly the restricted supply of existing homes is helping homebuilders at the margin.

The Home Builder ETF (XHB) is up smartly over the past 12 months, but we’re still very, very early in the housing recovery. The first-time homebuyer has been absent due to tough credit conditions and a difficult labor market. As those circumstances change, a lot of pent-up demand will release, which should drive homebuilder earnings for quite some time.

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