US home sales – adding together new homes and pending sales of existing units – plunged by 26% between December 2006 and August 2007. In posts in October and December I suggested activity was bottoming, in which case stock prices of US homebuilders should start to recover.

Combined sales slipped a further 2% between August and December and probably weakened again in January (new sales were down another 3%). Leading indicators have improved, however. Reflecting lower prices and mortgage rates, and possibly also recent government action aimed at boosting the supply of "jumbo" loans, the home-buying conditions index of the University of Michigan consumer survey strengthened in early February – see first chart. According to the February NAHB homebuilders survey, "traffic of prospective buyers" has risen to its best level for seven months.

Inventories of unsold new homes remain very high by historical standards but have fallen by 16% from a peak in July 2006. The decline should accelerate since new construction has fallen well below the level needed to cover the current pace of sales, which may now recover.

The S&P homebuilding group index has rallied 53% from a "double bottom" low traced out between November and January. The recovery is small relative to the prior fall but the technical position looks promising, with the index having broken and then found support on two significant downtrend lines – see second chart. A move back above the early February high would signal the likelihood of further gains.