Discounting Street projections of a plunge in housing activity, new home sales rose in May for the third consecutive month - reaching the highest reading of the year thus far. In terms of regions, the South posted the best results, rising to near last year's peak. The West and the Midwest increased somewhat but remained moderate, while the Northeast fell to the lowest level in over a year.

The increase is not really surprising, according to RBS Greenwich Capital Chief Economist Stephen Stanley. "It has been our contention that housing demand would pull back gradually but remain at generally healthy levels by historical standards as long as economic fundamentals (mortgage rates/ income growth) were supportive," he said in a report released last week. "This scenario seems to be playing out, as home sales have dropped from last year's unsustainable pace but remain high by historical standards."

Stanley added that the year-to-date average for new home sales is about 1150, about 10% lower than the 2005 pace, but 15% higher than the peak reading in the late 1990s. "In short, this year's numbers are down but still quite high," he stated.

Moving in the opposite direction, however, was the supply of new homes on the market in May. This, in addition to the rise in sales, allowed the month's supply to fall to 5.5 months, a third straight decline after the figure surged to almost 6.5 months in February. It is important to note, Stanley said, that the February figure was slightly inflated because sales were depressed during that month.

Although the supply is up from a year ago, the number of completed homes on the market has risen by less in percentage terms than homes "not yet started" or "under construction." Moreover, the median time that a completed home sits on the market before selling has moved up only slightly from 3.8 months a year ago to 3.9 months in May.

"Thus, there is not much evidence that the inventory situation will precipitate a dramatic drop in construction activity beyond what the starts figures to day imply," Stanley said.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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