New Home Sales in March came in higher than expected, even as prices fell from this month last year. According to Bloomberg, the Commerce Department reported that builders tallied sales last month at an annual pace of 356,000, down just slightly from February.

Inventories dropped to the lowest level in 7 years, while prices dipped to levels not seen since December 2003.

Without a doubt, lower inventories and sales activity that is becoming somewhat less abysmal than before is a good sign for homebuilders, who saw their stock prices jump today. Lennar (LEN) popped 14.99%, Hovnanian (HOV) rose 10.75% and Pulte Home (PHM), who recently announced plans to buy Centex (CTX), finished higher by 7.34%.

At the risk of being labeled perma-bears, while the news was cheered by most industry experts, that doesn’t mean builders will begin breaking ground any time soon on new developments. And since homebuilders make money by, well, building homes, the group still isn’t out of the woods. As prices keep falling in line with broader measures of home prices, building houses will remain a non-economic enterprise for the foreseeable future.

When will that trend reverse? While it’s anyone’s guess, a good sign would be when builders start buying finished lots that currently can barely be given away for free.

New Home Sales rose unexpectedly in September, but prices continue to fall. According to Bloomberg:

• Purchases increased 2.7 percent to an annual rate of 464,000
• Median sale price decreased to a four-year low
• The median price declined 9.1 percent from a year earlier to $218,400
• The supply of homes fell to 10.4 months from 11.4 months

Two quotes sparked our interest from two very different market participants.

First, we have Richard Dugas, the chief executive officer of Pulte Homes:

The industry continues to be plagued by tighter mortgage availability, a growing number of foreclosures, and a historically high supply of unsold homes.

Some of the biggest pieces of misinformation being spread by mortgage market participants are that tighter mortgage supply is (A) a bad thing for potential borrowers and (B) should be loosened to get us back to “normal” market conditions.

The fact of the matter is that people can get mortgages but they cannot get approved for high enough amounts to save the homebuilders. The reality is that there continues to be a huge demand for houses but market conditions are forcing them to be purchased at more affordable levels. This doesn’t bode well for homebuilders like Pulte, hence their lobbying efforts to increase tax credits for home purchases.

Second, we have Mark Zandi, chief economist at Moody’s Economy.com.

Builders are seeing the light … they are cutting prices more aggressively. They’re very nervous about all the foreclosures.

It is amazing that a quote like this one is newsworthy in October 2008. It is hard to imagine that the homebuilding industry is finally “seeing the light” in year 3 of the housing downturn. We continue to believe the new homes market will not reach any sort of bottom until there is meaningful of consolidation in the industry. Look at the investment and commercial banking sectors, which, although still in trouble, are at least starting work through their issues and fold weaker hands into the stronger ones.

Not only are the homebuilders competing against foreclosed homes, but they are also fighting against each other. It is time for this industry to start working together before they all end up in bankruptcy courts.

Finally, work began on the fewest single-family homes in 26 years and building permits also declined last month. While supply is falling, which is good for clearing out bloated inventories, less residential construction will deepen our recession.

The housing market led us into this mess, and while focus turns elsewhere as the problems spread throughout the economy, it’s not unreasonable to expect the housing market to eventually lead us out.