New home sales rose 25% in October

New home sales rose 25% in October, suggesting that a critical sector of the economy is continuing to gain strength as the end of the year approaches.

Builders sold homes at a seasonally-adjusted annual pace of 444,000 in October after a revised estimate of 354,000 for September, the Census Bureau said Wednesday. That beat economists' projections of 425,000 for October.

The strong report supports the idea that the economy is gaining some steam. Home sales are a crucial part of the recovery, because new home construction is still at less than half of its pre-recession peak, and each new home built supports between 3 and 4.5 new jobs, according to different estimates by economic consulting firms.

"Real estate took us into this mess, and in some ways real estate is going to lead us out of it,'' said Frank Friedman, chief financial officer of consulting firm Deloitte.

The outlook for housing depends on wage growth, household formation and the number of houses for sale, T. Rowe Price Associates chief economist Alan Levenson said in New York on Tuesday.

The good signs include a drop in new home inventories that builders need to sell, meaning that any increase in demand will lead quickly to new construction and new jobs, he said. The Census Bureau said builders have enough homes to satisfy 4.9 months of demand at the current sales pace, less than half of what they had during the recession and down from 6.4 months' supply in September.

The question mark is when household formation will rebound, after an extended shortfall, Levenson said. The number of households has historically risen by about 1.5% a year, as young people graduate from school or college and leave their parents' homes, according to Census data. That rate fell by two-thirds during the recession.

That has led to more than 2 million ''missing households,'' Trulia.com chief economist Jed Kolko wrote in a July 2013 report. The housing recovery will gain steam when more of those people strike out on their o! wn, he said.

The key to when that will happen is wage growth, Levenson said. Household formation has been slow to rebound during the recovery because wages continued to fall early in the recovery and grown tepidly into this year, he said.