by Luke Mullins

New home sales increased 24 percent in June from the previous month, but economists remain cautious

Sales of new homes bounced back stronger than expected in June--but not enough to erase concerns about the real estate market.

New home sales increased nearly 24 percent in June from the previous month's record lows, but remained roughly 17 percent below year-earlier levels, the Commerce Department said Monday. "Normally, a 24% increase in sales would be reason to pop open the champagne," Patrick Newport, a U.S. economist for IHS Global Insight, said in a report. "June's numbers, though, the second lowest ever, were abysmal."

The volatility in the market is directly linked to the expiration of a popular tax perk from Uncle Sam. The Obama Administration had been handing out tax credits worth up to $8,000 to qualified home buyers who signed a sales contract by April 30 and completed their transactions by the end of June. (The June 30 closing deadline was later pushed back to September 30 to give buyers extra time to complete the process.)

The tax credit helped juice sales in the run-up to its expiration, as buyers who would otherwise have made purchases in later months hurried to get contracts signed in time to qualify for the perk. But in the weeks after the April 30 deadline, demand evaporated. New home sales fell by a third from April to May, to the lowest level ever recorded. (Since new home sales are tallied at contract signing--as opposed to closing--May was the market's first month of functioning without a boost from the credit.

What's more, June's report included downward revisions to previous figures. "Net revisions for the past three months reduced sales by 62,000, indicating that the drop-off in activity following the expiration of the home buyer tax credit in April was larger than previously thought," Michael Gapen of Barclays Capital said in a report.

While economists welcomed June's upside surprise, the development was treated with caution. "The rebound in June shows that the worst of the tax credit 'hangover' may be over, although this is still the second slowest month on record," Brian Wesbury of First Trust Advisors said in a report.

The data on inventories, however, was more encouraging. "At present there are only 210,000 new homes in builders' inventories, the fewest since 1968, when the U.S. population was 35% smaller than it is now," Wesbury said. "At the recent pace of sales, it would take 7.6 months for builders to sell this inventor." That's an improvement from 9.6 in May.

In addition, the time it took sellers to land buyers decreased notably, as the median number of months for sale fell to 12.4 in June from 14.1 in May. "This was the best reading in a year," Newport said. "The 1.7 drop in the turnover rate was the largest drop ever."

Gapen predicts that home sales will improve later this year. "We expect the housing market to find a bottom over the next few months and return to a gradual upward trend thereafter," he said.

Newport expects total new home sales for 2010 to fall just shy of last year's levels. However, annual sales should increase to 528,000 in 2011 and reach 781,000 by 2012, he says.

Home Sales Rebound From Record-Low Levels