May new home sales dip 0.6 percent

New U.S. home sales dipped slightly last month, in another sign that the housing market recovery is likely to be gradual and prolonged.

The Commerce Department said Wednesday that sales edged down 0.6 percent in May to a seasonally adjusted annual rate of 342,000, from a downwardly revised April rate of 344,000.

The results fell far short of economists' forecast, but many analysts think new home sales hit bottom in January and will rise gradually as the economy gathers steam.

The median sales price last month rose 4.2 percent from April to $221,600, but that's still 3.4 percent below year-ago levels.

"The housing market may be starting to come back, but the improvement is hardly a tsunami," wrote Joel Naroff, chief economist at Naroff Economic Advisors.

Sales of previously occupied homes crept up 2.4 percent in May, the third monthly gain this year, the National Association of Realtors said Tuesday. There appears to be a strong consensus that existing home sales have hit bottom, but prices will continue to fall because rising unemployment is forcing more homeowners into foreclosure.

The housing crisis, which started in late 2006, triggered a global financial meltdown that pushed the U.S. economy into a recession at the end of 2007. Government tax credits and spending have helped bring some homebuyers back into the market, but federal programs to stem foreclosures have yet to make a dent.

"It is difficult to craft a scenario under which (loan) origination volumes would come anywhere close to reaching the numbers originally envisioned for the program," Jay Brinkmann, chief economist for the Mortgage Bankers Association, said this week as he lowered his 2009 forecast for mortgage volumes by 27 percent.

But overall demand for mortgages increased last week, his trade group reported Wednesday. Loan applications from homebuyers rose 7 percent from the prior week.

Still, houses are still sitting on the market unsold for months. There were 292,000 new homes for sale at the end of May, down more than 2 percent from April. More than half have been on the market for almost a year.

The inventory of homes for sale "will remain enormous, particularly with increased competition coming from distressed sales of existing homes," wrote Joshua Shapiro, chief economist with MFR Inc.