New home sales jumped 9.6% m/m to 433,000 in July, considerably above consensus (390K) expectations. Adding to the positive signal, the data were revised to show stronger sales over the prior few months with net upward revisions of 34,000 homes. An increase in sales in the Northeast (32%), the South (16%) and the West (1%) more than offset a decline in sales in the Midwest (-8%). Sales are now up on a y/y basis in the Northeast, but are still down in the other Census divisions. The rapid gain in sales over the past few months has greatly exceeded market expectations. It has been driven by greater affordability, a brighter economic outlook and, perhaps most importantly, the first-time homebuyer tax credit. It is possible that sales will dip lower once the homebuyer tax credit expires.

Inventory of homes for sale continued to tumble, falling 3.2% m/m to 271,000, the lowest since March 1993. The drop in inventory combined with the surge in sales pushed supply down to 7.5 months. This is a considerable downturn from the record 12.4 months reached in January and is the lowest since April 2007. This suggests that housing demand is equilibrating to supply, implying normalization in the new housing market. Today’s report is consistent with a wide range of other housing indicators that clearly show that the recovery in the housing market is under way.

US mortgage purchase and refinancing applications edged higher

The Mortgage Bankers Association’s index of mortgage applications rose 7.5% w/w in the week ending August 21 as both refinancing and purchase applications increased. The index of refinancing mortgages increased 12.7%, but the level of refinancing remained sluggish. The index of purchase applications increased 1.0%, marking the fourth consecutive weekly gain and pushing the four-week moving average up 1.7%. Refinancing mortgages made up 56.5% of applications, down considerably from the cyclical high of 85% in January.