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Home-Sales Data Paint Fuzzy Picture

Nicholas Yulico

New-home sales unexpectedly surged 16% in April, and inventories dropped, signaling that the key spring selling season may not be a total disaster for homebuilders.

While the data provided some optimism that the ongoing housing downturn finally may be showing signs of abating, industry watchers pointed out that the volatile monthly sales numbers can be misleading and don't necessarily signal a turnaround.

Moreover, the report came on the same day that luxury homebuilder Toll Brothers(TOL Quote) posted disappointing earnings and said the U.S. real estate market generally remains soft.

Sales of new one-family houses in April came in at a seasonally adjusted annual rate of 981,000 units, the U.S. Census Bureau said. That was up from the downwardly revised rate of 844,000 in March, but down 10.6% from a year earlier.

Economists expected an annual sales rate of 860,000 homes in April, according to Reuters.

"It's definitely a surprise," says Adam York, an economic analyst with Wachovia. "It's the biggest rise since 1993. Certainly a lot higher than most of us were expecting."

In a research note, Bank of America analyst Daniel Oppenheim said the data likely overstated the April sales increase. The issue boils down to the fact that the government doesn't take cancellations of sales contracts into account.

The Census Bureau tracks the sale of a new home, but once a contract is entered, the deal is considered final. That number isn't changed if the contract is canceled, nor does it change if the contract is canceled and then resold later on.

Oppenheim has argued that new-home sales reports in February and March have underestimated the true level of demand because they didn't count the resale of homes where contracts had been canceled. That would make the big month-over-month jump in April an artificial comparison.

"We think the reality is that trends worsened" in April from recent months, Oppenheim said in his note.

Inventories fell to 6.5 months of supply at the current sales rate, down sharply from the revised 8.1-months level in March, the Census Bureau said.

The raw inventory of homes totaled 538,000 units, the lowest level since January. But although inventory has fallen, it remains at historically high levels.

And as Oppenheim points out, the inventory number is also misleading.

"While we believe inventory levels are falling, as builders focus on selling speculative inventory, the Census Bureau continues to understate the inventory levels because canceled homes do not get counted," Oppenheim said.

Home prices also didn't provide much reassurance of a turnaround. The median sales price of a new home fell to $229,000 in April from $257,600 in March.

The price drop is either a signal that homebuilders are lowering prices to move product, or that lower-priced homes are accounting for a larger portion of all sales.

One real estate hedge fund manager who invests in the sector says the pricing issue is more important than the actual sales number.

"The monthly sales number is rendering itself irrelevant for now. It's very, very choppy data," says the manager, who remains bearish on housing. "The more relevant issue is that prices are coming down, and you don't know what incentives were given (by builders)."

Shares of homebuilders initially surged on the home-sales data, but later gave back some of those gains.

Pulte Homes (PHM Quote) was up 49 cents, or 1.8%, to $27.67; D.R. Horton (DHI Quote) was down 3 cents, or 0.1%, to $23.60; and Lennar (LEN Quote) fell 12 cents, or 0.3%, to $46.02.

Toll Brothers shares were up 33 cents, or 1.1%, to $30.10. The builder reported a 79% plunge in second-quarter earnings earlier Thursday, and also declined to give a full-year profit forecast because of the uncertain market.

On the conference call, CEO Bob Toll said he was surprised by Treasury Secretary Henry Paulson's recent comments that the hard times are mostly over for the U.S. housing market.

"I wondered how many communities he had and where he got that information," Toll told investors on the call. "We have not got the bad times behind us yet."

Referring to the government's new-home sales data, Toll told investors on the call that the monthly comparison looks good, "but what you're comparing to stinks. That's why you're getting unhappiness expressed by the public homebuilders."

York, the economic analyst from Wachovia, also says he's not ready to call a bottom to the housing decline.

"Things are looking more positive than we would have said they were two months ago," he says. "We expect some moderate pullback next month. We don't want to say everything is great from here. It may signal that the bottom is closer."