New homes are suffering from the same affliction as existing homes – a dearth of inventory.

The supply of new homes stands at only 151,000 units. With so few homes to offer, sales have suffered, dropping 7.3% in December to an annual rate of 369,000 units.

The percentage drop in new-home sales, though mildly discouraging, shouldn't be fretted over. Sales were actually revised up by 22,000 units in November, so the 7.3% drop is from a much higher base than originally reported. That said, at the current sales pace, inventory is still only 4.9 months.

The upside is that tight supply nearly always leads to higher prices. That's the case today: the national median price for a new home increased 1.3% to $248,900 in December to post the highest median price in five years.

On the existing-home front, the pending sales index fell 4.3% in December to pull the year-over-year comparison, which had been trending in the double digits, down to a plus 6.9%. Until more inventory avails itself, establishing an uptrend in existing-home sales will be difficult.

The good news is that prices – new and existing – should continue to trend higher, which will eventually draw more inventory and more buyer interest into the market.

In fact, home prices increased 0.6% in the S&P/Case-Shiller Home Price Index for November. The year-over-year increase is now over 5%, the largest percentage year-over-year price increase since 2006. The most encouraging news in the index is that gains were found in nearly all the metropolitan areas Case-Shiller covers.

Economic growth should also trend higher in 2013. We say this despite gross domestic product posting a surprising 0.1% contraction in the fourth quarter of 2012. We not concerned, because fewer government expenditures were the cause of the shortfall. Less government spending isn't necessarily bad, because resources government spends are resources taken from the private sector.

As for the private sector, we expect it to pick up the slack. Residential investment will likely lead the way, which is also good news. Because residential investment is a leading economic indicator and a strong force for economic growth, it appears very unlikely the economy will slip back into a recession. Indeed, it appears much more likely economic growth will accelerate through the year.

As economic growth accelerates, we should expect interest rates to move higher. They already have. The 30-year fixed-rate mortgage rose to a four-month high this week. Market forces appear to be overriding the Federal Reserve's strategy to hold rates near the all-time lows set in late November.

With the stock market moving higher, we expect more pressure for rates to rise. We say this because investors are growing increasing confident, and when they grow confident they pull money out of bonds and put it into stocks. This asset rotation pressures interest rates and yields to rise.

Last week, we said that the market shouldn't fear higher interest rates, because higher rates are a sign the economy is improving. On the other hand, this also means the risk of holding out for lower rates will only increase.

Courtesy of Jessica Regan.

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