This morning's new home sales report was moderately encouraging as overall new home sales rose in September to a seasonally adjusted annual rate of 464,000, up 2.7% from August's rate of 452,000 but down 33.1% from last year's rate of 694,000.? Unlike housing starts, a rise in new home sales is a good thing since it helps clear out the huge inventory overhang. ?

Total inventories (not seasonally adjusted) fell to 396,000 from 422,000 in August and 527,000 a year ago.? On a monthly basis, the improvement was slightly more significant in the number of completed homes for sale, which were down 7.1%.? On a year-over-year basis, though, the improvement there has been much more muted, down just 11.0%.? The combination of slightly rising sales on a monthly basis and falling inventories have helped push the months supply figure down to 10.4 months from 11.4 months in August.? The August figure had been the highest sine 1982.? The figure is still well above normal (about 6 months) and the year-ago level of 9.4 months. ?

A note of caution, however: almost all of the improvement in sales came from one region, the West, where sales surged 22.7%.? Last month the West was particularly weak on a month-to-month basis, so perhaps both were flukes.? Relative to July, September in the West was down 14.3%, not dramatically out of line with the nationwide 10.3% decline over the two months.? Sales also rose a slight 0.7% in the very important South region on a month-to-month basis, but year-to-year sales are down 23.8% in Dixie.? Worst hit by far on a month-to-month basis was the Northeast, which was down 21.4% and is off a stunning 65.1% on a year-over-year basis.? It is fortunate that it is the smallest and least-important region for the homebuilders.? The Midwest was down 5.8% month-to-month and 37.5% year-over-year. ?

While the news is slightly encouraging, I am still not confident that we have seen the bottom of the new home market.? Sales for new homes are recorded when sales contracts are signed, and the latest wave of the credit crunch hit mid-month, so there is a very good chance that the improvement will be reversed in October.? New homes compete with existing homes, and there is a still a huge overhang of inventory there, and much of that inventory is distressed. ?

The public homebuilders really have no economic function in this environment.? Any activity on their part is detrimental in the medium-term to the overall economy.? That is a harsh assessment, but really for the good of the country, the homebuilders have to either die off or go into hibernation for a few years. ?

I know I sound like a broken record, but stay away from anything housing related.? Obviously that includes the homebuilders like D.R. Horton (DHI), Ryland (RYL) and Pulte (PHM).? But it would also include the Home Depots (HD) and Lowes (LOW) of the world, along with furniture firms like Ethan Allen (ETH) and Furniture Brands (FBN).