New-home sales dropped 2.1% in May to a seasonally adjusted annual rate of 319,000 units, according to numbers released today by the U.S. Census Bureau and the Department of Housing and Urban Development. In recognition of the one-year anniversary of the expiration of the home buyer tax credit, May’s sales pace stood 13.5% above the previous year—a result of the fact that new-home sales fell off a cliff in May 2010, with a 32.7% decline from April 2010, the last month the tax credit was in place.

The vulnerability to new-home sales numbers to variables such as the tax credit has led Patrick Newport, U.S. economist at IHS Global Insight, to instead focus on moving averages. “If you overlook that tax credit, the numbers over the past year have been flat at record-low numbers. They’re really miserable by historical standards,” he said on a call with Builder today. “That’s what the permit numbers are telling us and what the builder sentiment numbers are telling us.”

That lack of builder confidence has led to a pull-back in building, which, in turn, has brought inventory of new homes for sale to 166,000—the lowest number on record (data start in 1963). Completed homes for sale dropped to 64,000, the lowest level seen in almost 40 years. Inventory fell to a 6.2-month supply.

Low inventory numbers will help business pick up faster once demand returns, Newport says, but he’s not expecting that turnaround in the very near future. “New-home sales and housing permits are usually indicators of what’s to come, and they’re telling us not to expect much of an improvement over the next couple months.”

While the median price of an existing home fell in May—to $166,500 according to the National Association of Realtors—the median sales price of a new home rose 2.6% for the month, bring it to $222,600.

That disparity in prices between new and used is likely contributing to the fact that the median number of months a new home stood on the market rose in May to 9.2.

So what’s the sign builders should look for to know when new-home sales will finally begin to pick up from the bottom? “I think the thing to look for is a turnaround for permits of single-family homes,” Newport said. “I look for activity in states that are creating jobs. That, I think, will be an indicator of things starting to turn around.”

Claire Easley is senior editor, online, atBuilder.

Learn more about markets featured in this article: Greenville, SC.