Best Home Sales in Five Years Signal Building Gain

Residential construction, residential sales, new construction,

The gains will keep propelling residential construction and home values in the U.S., giving the world’s largest economy a boost.

Sales of new U.S. homes rose in June to the highest level in five years, pointing to gains in residential construction that will support the economic expansion in the second half of the year.

Purchases climbed 8.3 percent to an annualized pace of 497,000 homes, the highest level since May 2008, the Commerce Department said today in Washington. The median estimate of 77 economists surveyed by Bloomberg called for a gain to 484,000.

Growing employment and the desire to take advantage of historically low borrowing costs before they rise further will probably keep releasing pent-up demand, driving builder confidence and sustaining increases in home construction. Federal Reserve Chairman Ben S. Bernanke last week said policy makers are prepared to act if the recent jump in borrowing costs shows signs of hurting demand.

“It’s a builder’s market,” said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh, who forecast sales would climb to a 500,000 pace. “The housing market is poised for further gains and is a key component of the U.S. recovery overall.”

Projections in the Bloomberg survey ranged from 415,000 to 518,000. The Commerce Department revised the May figure to 459,000 from a previously reported 476,000.

Stocks dropped as investors weighed global manufacturing data and earnings reports from Apple Inc. and Caterpillar Inc. The Standard & Poor’s 500 Index declined 0.4 percent to 1,685.94 at the close in New York.

European Factories

In Europe today there were signs that factories in the euro area are making a comeback, signaling the currency bloc’s economy is emerging from a record-long recession. A manufacturing index rose more than forecast in July, indicating that segment of the economy was expanding for the first time in two years.

The encouraging news from Europe contrasted with China, the world’s second-largest economy, where other figures showed manufacturing weakened more than estimated this month.

Similar data for the U.S. today showed factories expanded at a faster pace than forecast in July.

The Commerce Department’s report showed sales of new houses jumped 38.1 percent last month from June 2012, the biggest year-over-year gain since January 1992.

Sales of new properties, which are tallied when purchase contracts are signed, are considered a more timely measure of the market than sales of previously owned dwellings, which are counted when a sale is final. New-home sales accounted for about 7 percent of the residential market in 2012.

Mortgage Rates

The gain in new-home sales is an early signal that the recent jump in borrowing costs has yet to derail demand.

“It suggests a more uplifting message in terms of how the market will be able to absorb higher interest rates,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York.

Another report this week was less positive. Purchases of existing homes unexpectedly fell 1.2 percent to a 5.08 million annualized rate in June, figures from the National Association of Realtors showed. Tight inventories were constraining sales and contributed to a 13.5 percent jump in the median price of an existing home compared with June 2012, the report showed.

A reduction in the number of distressed properties, those in foreclosure or worth less than the homeowner owes, may be another reason sales of existing homes are cooling as demand for new homes keeps rising, said Bank of America’s Meyer.

All Sold

Gretchen Apps, a broker for Weichert Realtors in Chadds FordPennsylvania, said demand for new homes is outpacing land supply. Since January, she and her co-worker have sold all of the new homes she had listed — one model home and five under-construction or soon-to-be-built inWest Chester, Pennsylvania.

“It’s been really moving: we even sold where we really didn’t have anything to show,” Apps said. The houses, all priced at more than $600,000, look traditional even though they have modern amenities inside, she said. “We’re sold out. We are just sad we don’t have more land.”

While higher borrowing costs spur demand in the short run as on-the-fence buyers take the leap to lock in rates, the current increase in interest rates may represent a threat longer term. The average rate for a 30-year fixed mortgage was 4.37 percent last week, according to McLean, Virginia-based Freddie Mac. It reached a record low of 3.31 percent in November.

While rates are still historically low, that means the monthly payment on a $200,000 loan now would be $998 compared with $877 in November.

Rate Impact

“At least some of the June strength may have reflected demand pulled forward from future months, and it is possible that we will see some softer prints going forward,” Guy Berger, an economist at RBS Securities Inc. in StamfordConnecticut, said in a research note.

In testimony before the House Financial Services Committee last week, Bernanke said housing activity and prices will probably continue to recover, notwithstanding the recent increases inmortgage rates.

If the jump in borrowing costs were deemed large enough to hurt the recovery, then “the current pace of purchases (NHSLTOT) could be maintained for longer,” the Fed chairman also said.

The median selling price of a new home appreciated 7.4 percent to $249,700 last month from $232,600 in June 2012, today’s report showed.

Purchases rose in three of four U.S. regions, led by an 18.5 percent surge in the Northeast. They climbed 13.8 percent in the West and 10.9 percent in the South. Demand dropped 11.8 percent in the Midwest.

More Jobs

An improving job outlook may be creating confidence and encouraging buyers. Employers in the U.S. added 195,000 jobs in June for the second straight month.

Improvements in the employment situation and the housing market could boost business at companies such as Whirlpool Corp. (WHR) The outlook for North America is improving, the appliance makers’ chief executive officer Jeff Fettig said in a July 19 earnings call.

“We’re increasing our industry demand assumption to be up 6 percent to 8 percent for the year,” Fettig said. “We continue to see very positive trends in U.S. housing as well as pickup in really all segments of the market.”

Homebuilders have also grown more confident. The National Association of Home Builders/Wells Fargo index of builder sentiment climbed to this month to a seven-year high, the Washington-based group reported last week. The gauge has climbed 13 points in the latest two months, the biggest back-to-back advance since January-February 1992.

To contact the reporter on this story: Jeanna Smialek in Washington

See Original Article