new home sales rise

New home sales increased far more than expected, jumping 17.5% month-over-month (m/m) in December to an annual rate of 329,000 units, above the 300,000 rate forecasted and November's figure was downwardly revised to a 280,000 annual unit rate. The median home price rose 8.5% y/y and 12.1% m/m to $241,500. Inventory of new homes for sale fell to 190,000 units, the lowest level since January 1968, per Bloomberg. At the current sales pace, it would take 6.9 months to exhaust the supply of homes on the market, down solidly from November's 8.4 rate. New home sales are considered a more timely indicator of conditions in the housing market than existing home sales-which also jumped over 12% m/m in December-as they are based on signings instead of closings.

New home sales have rebounded further from the all-time low of 274,000 reached in August, due to high affordability and the recent improvement in consumer sentiment as economic data has improved as of late. However, for all of 2010, sales are down 14% compared to the last year, at a level of 321,000, which is the lowest level in data going back to 1963, per Bloomberg. Moreover, the housing market continues to be weighed down by reluctance by homeowners to make large purchases while still facing high unemployment and reduced ability to trade up, as nearly a quarter of all homeowners have negative equity in their homes.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest commentary, House of the Rising Sun: A Check-Up on Housing, that most measures of housing affordability have improved markedly, but the key to improving demand may lie on job growth as the prospects for employment and housing are likely more linked today than any time in history, given the severity of the crisis in both. Liz Ann also points out that housing has probably broadly bottomed, but the path up is likely to be relatively flat, elongated and volatile among geographic regions. Along with a downturn in the unemployment rate, other necessary ingredients for a health recovery in housing would be a further loosening of the credit environment, no significant (further) spike in mortgage rates, and general improvement to consumer confidence. Again, we believe the prospects for housing are improving, though certainly not stellar, but our optimism about the economic recovery could feed into better-than-expected housing news as well. Read the rest of the article and other timely commentary by Schwab experts at www.schwab.com/marketinsight.