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Surprising rise in new home sales for April

Despite the projections of a downward spiral in the housing market by Street analysts, the U.S. Commerce Department reported last week that sales of new single-family homes rose 4.9% in April. This figure caught market participants by surprise as they had been expecting a month-to-month decline based on rising mortgage rates that are currently at their highest levels in approximately four years.

The rise in sales, however, is not as impressive as it initially appears. Last month's pace was down 5.7%, compared to a year ago, and while the median home price of $238,500 is up 2.8% from March, it only represents a 0.9% increase in the median sales price from April 2005. In addition, the backlog of unsold homes rose 2.4% to a record of 565,000 unsold homes by the end of last month. If sales remain at the April pace, this translates to 5.8 months to deplete the backlog.

However, Stephen Stanley, chief economist at RBS Greenwich Capital, still views this surprising rise in a positive light. While he acknowledges that the actual data is somewhat weak, he believes this to be a special case, thus deserving of special consideration. "The housing market is clearly softening, and what matters is not so much whether it is cooling, but how fast and to what level and when it will stabilize," Stanley stated. "In that regard, the new trajectory actually has a plausible positive angle, namely that new home sales have increased for two months in a row (albeit from a February level that was obviously weather-depressed) and seem to be reasonably steady so far this year, albeit at a pace that is sharply down from 2005's overheated clip."

The rise of sales of new homes in April is in line with RBS Greenwich's view that most of the decline in housing demand from last year has been a one-time washing-out of speculators, reflected in a single downward adjustment in activity. Accordingly, instead of the downturn that was projected, the sales in April could even indicate good things to come in the housing market.

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