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New home sales hit six-year high, but they’re still struggling

While the sales of newly-built homes hit a six-year high in August, the numbers aren’t as dazzling as they seem when put in context.

New home sales jumped 18 percent last month from July to a seasonally adjusted annual rate of 504,000, the Census Bureau and the Department of Housing and Urban Development reported Wednesday. That’s 33 percent higher than a year earlier, when home prices and mortgage interest rates were climbing.

Last month’s performance blew past the expectations of many economists, including the 74 surveyed by Bloomberg, whose median prediction for the pace of  new home sales was 430,000. The activity also stands in stark contrast to the 1.8 percent drop in sales of previously-built homes last month.

But there’s still a long way back to normal.

From 2000 to 2003, before the housing bubble, new home sales reached 960,000 a year on average, according to the National Association of Home Builders. That means today’s annualized sales pace is roughly half of what it should be.

“Looking at the larger picture, the numbers are still fairly depressed,” said Robert Denk, a senior economist at NAHB. “We should be seeing 900,000 new sales or better.”

The percentage gains are also less impressive when considered in terms of year-to-date sales. The new home sales in the first eight months of this year were 306,000 – only 2 percent higher than the same period a year earlier, the government’s data show.

It’s important to keep in mind that new home sales are not a solid measure of demand for homes. They account for only a small slice of buying activity, about nine percent in each of the past two years. But they are important to the economy because the construction industry contributes to job creation.

The share of new homes being sold is unusually low in part because fewer of them are being built.  The share of builders breaking ground on new homes fell 2.4 percent to a 643,0000 rate in August from July, the government reported earlier this month.

There are many reasons that builders are not building as much as they should be at this point, including lack of demand. But another key reason has to do with the lack of available lots for new homes.  Developers, who provide land to the builders, simply can’t get their finances in order. Real dollar volumes of loans to real estate developers only just broke a 20-quarter-long streak of year-over-year declines in the second quarter of 2012, according to an analysis by IHS Global Insight.

“These are the loans developers use to get the lots ready to build on,” said Stephanie Karol, an economist at IHS. “It’s taken developers so long to get the financing to lay the groundwork for more houses to enter the inventory that it’s created a constraint on supply.”

There’s a 4.8-month supply of new homes, according to government data, meaning it would take that long to sell the inventory of new homes on the market at the current pace.  That's the lowest the inventory has been since June 2013.