Demand for new construction weakened last month, ending a short-lived upward trend

600 new home sale REUTERS John Gress.jpg

Home builders looking for a little bit of hope won't get much from today's report on new home sales. After rising for two-months, they declined in May by 2.1%, according to the Census Bureau. Although there may be reason to believe that residential construction will boom before too long, demand for new homes remains very low.

Here's the historical chart:

new home sales 2011-05.png

At the annualized pace of 319,000 in May, new home sales remained in the range that we've seen over the past year. Still, this rate is relatively high in the context of 2011 -- it's the second highest this year, after April's pace of 326,000.

On a regional basis, the northeast can be mostly blamed for the decline. Its new home sales fell by 27%. The south was the only region where sales rose in May, just slightly by 2%.

Despite the number of new home sales falling, the number of new homes for sale at month's end was just 166,000. That's the lowest number of new homes for sale since the Census Bureau began keeping records in 1963. For now, this is a good sign. As the number of new homes in the market stays low, the little buyer demand out there will more easily soak up the market's existing vacancies and the market will clear sooner.

Residential construction has been so low for so long that it has nearly neutralized the overbuilding that took place during the housing bubble. As the U.S. population grows, more new homes will be needed. So look a rebound in new home sales to foreshadow that coming boom. But for now, home buying demand remains very low. Until that changes and vacancies decline, a big home building uptick will remain elusive. In this case, that likely depends mostly on consumer confidence and jobs growing.

Image Credit: REUTERS/John Gress

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