Business torrents

The implosion of the housing market in the United States started a chain reaction that led to the global economic downturn.

But there are strong hopes now that the U.S. market will lead consumers into the recovery.

Purchases of new homes in the U.S. smashed all expectations in July, rising 9.6 per cent from the previous month to a 10-month high of 433,000 units, the U.S. commerce department said yesterday. It was the first time more than 400,000 homes sold since last October.

The new-home market is closely watched because it represents forward-looking sales, with residential construction being a powerful economic driver.

"This report was surprisingly strong and helps to further the story that the U.S. housing market has now reached a stabilization point," said Ian Pollick, economics strategist at TD Securities. "Housing conditions remain favourable due to low mortgage rates, deep discounts and a rosier economic outlook."

The market consensus was for a 1.6 per cent rise. On an annual basis, sales are still down by 13.1 per cent. However, this was the fourth consecutive month in which sales rose, a trend not seen in five years.

"The items supporting a housing recovery have been working in tandem over the past while and they are still going strong like the Energizer Bunny," said Jennifer Lee, an economist with BMO Capital Markets. "This is another encouraging sign that U.S. housing is finally on the mend."

The relatively stronger new home sales mean inventories are down to the lowest level since 1993. The overhang from inventories was creating a serious drag on the economy as builders slashed prices but found few takers.

The sales jump was led by a 32 per cent bump in the northeastern United States. Sales also increased 16 per cent in the South (which includes Florida), but dropped 7.6 per cent in the Midwest.

The new housing report follows on the U.S. Case-Shiller home price index released Tuesday, which was also much stronger than expected for existing home sales. The index rose 1.4 per cent in June, the second consecutive monthly increase.

Eric Lascelles, chief economics and rate strategist at TD Securities, said the home sales data add “considerable credence to the view that a sustainable recovery is at hand."

The fact that housing prices are stabilizing and potentially growing is important in helping banks eventually off-load toxic assets such as subprime mortgages, said Patrick Newport, an economist with IHS Global Insight.

One big question is how much of an impact the $8,000 (U.S.) first-time homebuyer tax credit is having on the market and what will happen when it expires in November.

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