Updated August 23, 2012, 6:01 p.m. ET

New-Home Sales Jumped 26% in July

By ROBBIE WHELAN

Sales of newly built homes rose briskly in July and inventories declined to the lowest level on record, a sign that builders may need to ramp up construction in the coming months.

The Census Bureau reported Thursday that builders sold a seasonally adjusted annual rate of 372,000 homes in July, up 26% from the same month last year. Inventories of new homes available for sale fell to 142,000 units, the lowest level recorded since the government started tracking the figure in 1963.

Economists were encouraged by the report, which they view as a harbinger of better times ahead. As home builders continue to deplete their inventory, they will "start construction on more new homes, and that's when construction will start to add to the economy," said Mark Vitner, senior economist with Wells Fargo Securities.

A separate report, released Thursday by the Federal Housing Finance Administration, which regulates government-sponsored mortgage companies Fannie Mae and Freddie Mac, showed that prices of previously owned homes rose 1.8% during the second quarter when compared with the first quarter. That was the biggest quarterly jump in prices in more than six years.

Both reports, combined with a recent spate of strong earnings reports from publicly traded home-building companies, are more evidence that the housing market is showing renewed signs of life.

The rise in new-home sales partly reflects the low inventory levels in the market for existing, or previously owned, homes. On Wednesday, the National Association of Realtors reported that nationally, inventory levels for existing homes fell to a 6.4-month supply in July, down from a 9.3-month supply a year earlier.

With so little supply in the existing-home market, a growing number of buyers are choosing new homes, to the point where "new home sales growth is outpacing growth of in traditional existing sales," says Ivy Zelman, an independent housing analyst who turned bullish on the homebuilding sector last year.

Potential buyers are "frustrated" with the existing-home market, says Scott Koppendrayer, director of sales for LDK Homes, a high-end custom builder based in St. Michael, Minn. "The stuff that's left, it's not the nice stuff."
That, of course, has been a boon for homebuilders. The number of existing homes listed for sale in the Minneapolis-St. Paul area, where LDK builds all of its homes, has fallen 36% in the last year, according to real-estate information company Zillow Inc.

Mr. Koppendrayer says his company is on pace to sell between 65 and 70 homes this year, up from 38 in 2010. Older homes that are "priced to be a good deal [are] unfortunately poorly maintained, or in a bad location," he says. "That's why so many buyers are coming to us."

Unlike existing homes, which have seen prices rise in recent months, builders are holding the line on prices of new homes. According to the Census Bureau, the median price for a new home sold in July was $224,200, down from $229,900 in July a year ago.

Douglas Yearley, chief executive of Toll Brothers Inc., TOL -1.18%the nation's largest builder of large luxury homes, said his company is being cautious about raising prices because it still worried about driving away skittish consumers.

"We're still scared," he said in a conference call with analysts Wednesday. Still, Toll reported strong quarterly earnings Wednesday, with income rising 46% and orders for new homes surging 57%, compared to a year earlier. Toll's numbers come on the heels of strong quarterly earnings results for other big public builders, including D.R. Horton Inc., DHI -1.16%Meritage Homes Corp. MTH -1.51%and PulteGroup Inc. PHM +0.23%

Ian Pickering, a 40-year-old information technology director for a defense contractor, said he and his wife had looked at seven previously owned homes, all in the $200,000 to $400,000 price range, in the last three weeks but were unhappy with the selection.

"We've been out every weekend at open houses," he says. "For the square footage we wanted, there was really nothing on the market. I saw plenty of homes with supposedly remodeled kitchens, but all they had done is replaced the countertops. That's not much of a remodeling."

The Pickering family finally decided to look at a new home built by Ryland Homes, a large national builder. On Wednesday evening, the family closed on the purchase of four-bedroom, three-bath ranch house with a three-car garage and access to a public boat ramp in Lake Nona, a Ryland development outside of Orlando, Fla., for $335,000.

Corrections & Amplifications
According to the The Census Bureau, builders sold a seasonally adjusted annual rate of 372,000 homes in July. An earlier version of this story said builders sold a seasonally adjusted annual rate of 370,000.

Write to Robbie Whelan at Robbie.Whelan@wsj.com

New-Home Sales Jumped 26% in July - WSJ.com