Sales of new homes fell by 2.5% in May, continuing the irregular but persistent slide that began in the fall of 2005, while sales of existing (previously owned) homes rose by 2.0% in May. In fact, existing-home sales have been in a narrow range all year, while new-home sales have been trailing downward systematically.

It’s clear that the relatively strong performance of existing-home sales in recent times reflects rising sales of foreclosed homes that get into the multiple listing service. While it’s good that foreclosed homes are selling ― generally at fire-sale prices ― rising foreclosures are hardly a sign of vitality in the nation’s housing market.

Indeed, rising foreclosures dump more inventory onto the market, making it even harder for builders to sell new homes in inventory.

The key to a meaningful turnaround in the housing market is recovery in net sales of new homes (new orders less cancellations) to levels that systematically exceed starts of new homes for sale (excluding homes built on owners’ lots).

Such a pattern will systematically reduce inventories of new homes on the ground (under construction or completed) and pave the way for recovery in production of new housing units — the key to restoring housing as a positive factor in economic growth.

NAHB’s proprietary survey of large single-family builders, accounting for about one-fourth of all for-sale homes built in the U.S., has yet to show meaningful stabilization of seasonally adjusted net home sales, as reported through May. Gross sales continue to trend downward, and cancellation rates measured relative to gross sales or sales backlog still are at historically high levels.

NAHB’s broad-based Housing Market Index, based on monthly surveys of roughly 400 single-family builders, show no improvement in builders’ perceptions of the demand side of the market.

Indeed, the HMI fell back to 18 in June, returning to the record low posted in December of last year. All three components of the HMI — current sales, sales expectations and buyer traffic — were at or near record lows, and all four regions of the country had depressed HMI readings.

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