At 10:00 A.M. (EDT), we received the latest report on the steadily improving housing market when the U.S. Department of Commerce issued new residential data for the month of May. At first blush, the report was very positive, with new home sales higher on both a sequential and year-over-year basis.

Specifically, sales of new single-family houses in May came in at a seasonally adjusted annual rate of 476,000. That figure was 2.1% above the revised April figure and up a notable 29% from the prior-year figure of 369,000 units. The consensus expectation called for sales of roughly 462,000 new units.

A geographic breakdown of the new home sales data also made for a nice reading. New home sales were up 76.6%, 27.9%, and 18.6%, year to year, in the Midwest, the South, and the West, respectively. Sales in the Northeast were flat, year over year. The increases in the South and West regions are particularly encouraging, as those areas are the two biggest housing markets in the country, especially in terms of new residential construction.

The latest data—another positive snapshot of this improving sector—come on the heels of this morning’s encouraging report on home sale prices. Indeed, the Standard & Poor's/Case-Shiller home-price index showed that prices increased by 12.1% for the 20-City Composite in the 12 months ending April, 2013. It was the highest monthly gain in the history of the S&P/Case-Shiller Home Price Index. As of April, average home prices across the United States are back to their early 2004 levels for both the 10- and 20-city composites. All these factors augur well for a continued recovery in this all-important sector of the U.S. economy. 

However, we would be remiss if we did not warn investors that the recent rise in lending rates—sparked by comments from Federal Reserve Chairman Ben Bernanke that the lead bank will look to begin tapering off its bond purchases later this year—bears watching. The rising mortgage rates, coupled with higher selling prices, could raise some affordability concerns for prospective buyers going forward. Still, we don’t expect the problems of the last decade to return, as the homebuilders are acting with much more discipline with regard to construction activity these days, which should limit the downside risk of too many unsold properties flooding the markets. In fact, the months’ supply of houses on the market stands at 4.1, which is well below the historical norm of about six months. The favorable supply/demand balance for the homebuilders should lead to further firming of home prices in the coming months and limit the near-term number of speculative properties on the market.

All in all, the latest data on new home sales and home prices are yet another sign of a strengthening housing market. The construction and sales of new homes—though only a small fraction of the nation’s total home sales—is vital to the overall health of the U.S. economy as each new property built usually creates an average of three jobs for a year and generates close to $90,000 in tax revenues.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.