Remember last month when the Census Bureau reported a big 17.5% increase in new home sales? That may have been a blip after all. In January, new home sales fell by 12.6%. That brought the number of seasonally-adjusted, annualized new home sales from a downwardly revised 325,000 in December to 284,000 in January -- only marginally above the level of 281,000 in November. January's decline suggests that a sharp recovery in new home sales is not very likely.

First, here's the historical chart:

new home sales 2011-01.png

You can see a couple recent blips in June, September, and December. But every other month since May -- when the home buyer credit expired -- new home sales have been below 285,000. The lowest pace on record, since 1963, was set in August with 274,000. So as you can see from the chart, the area where sales appear to be stabilizing is right around that all-time low.

We're beginning to see some divergence now between existing home sales and new home sales. Both rose in December, but as new sales fell in January, existing sales continued to climb. This is actually what we should expect considering current market conditions. There is still an enormous existing home inventory due to distressed properties and foreclosures. Great deals can also be found on such properties. As a result, building a new home is comparably less attractive.

Although we may continue see some volatility, when new sales rise temporarily here and there, the general rate should remain relatively low in the near-term. Until the large inventory of distressed or defaulted properties has been mostly bought up and as prices continue to fall, new home sales will have trouble recovering.

Of course, this is particularly bad news for approximately two million construction jobs that have been shed since 2008. Unfortunately, a low rate of new home sales is a necessary condition that the housing market must endure to recover. If home builders were to ramp up construction, then they would only increase the already large inventory of homes available, which would further swell the supply of homes available in the market. That would make it harder for the sector to stabilize. As home construction remains weak, prices will eventually find a bottom as the available supply of homes wanes.

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