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Once awash in brand-new houses begging for an owner, the metro area is seeing signs of a turnaround in that part of the housing market.

The number of new homes for sale has fallen to its lowest level in five years, according to a report due out next week from the local office of Metrostudy, a national construction research company. And builders are confident enough that during the first six months of the year they have pulled 45 percent more permits for new homes than last year.

Mike DeVoe, Minnesota division president of Ryland Homes, part of the Ryland Group Inc. in Calabasas, Calif., said that there's a sense the tortured housing market has reached bottom. While there's still fear out there about making big investments, there's also pent-up demand, DeVoe added. "Life goes on," he said. "People have children."

At the end of the second quarter, the overall inventory of new single-family homes in the metro area stood at 2,758, down from 3,642 a year ago.

Metrostudy's inventory numbers include homes that are under construction and have already sold, as well as new houses sitting empty. Ryan Jones, research manager at Metrostudy, said the numbers suggest that the Twin Cities are is working through the construction overhang. But he cautioned that a full recovery will take time.

"The housing market is still going to recover slowly over the next couple years as the economy remains weak and job numbers remain low," he said.

The market has gotten extra stimulus from rock-bottom interest rates and the now-expired federal tax credit this spring -- April through June closings on new homes were up 14 percent from the same period a year ago -- the first year-over-year increase since 2005, according to the Metrostudy report.

Building permit numbers released Thursday by the Builders Association of the Twin Cities bolstered the idea that insiders see something other than a one-time boost to sales taking place. The permit report, which includes data from most of July, said that so far this year the number of permits issued to home builders was up 45 percent from a year ago.

A 2 1/2-month supply now

At the current sales and construction pace, there is a 7.2-month supply of new houses on the market. A market is generally considered balanced when there's a six- to seven-month supply.

For those shopping for a finished new house, the Metrostudy report suggests that options are dwindling. Right now there's a 2 1/2-month supply of finished and vacant houses.

While the industry has made an attempt to draw down inventory levels as far as possible, some builders say that it's essential to maintain some inventory.

For example, K. Hovnanian, a national builder based in Red Bank, N.J., now maintains three to four houses completed and ready for sale per development locally so that it can still serve buyers who don't want to, or can't, wait for a house to be built.

A pickup in interest

Art Plante, K. Hovnanian's division president, said that while activity has picked up, sales have slowed since the federal tax credit expired in April. But he's hopeful. During the recent launch party for Donnelly Farms in Lakeville, where house/land packages cost $200,000 and up, more than 100 people showed up to check out the project.

Ryan Nelson and his wife decided to build a new house with Ryland Homes at the Lakes in Blaine after they had their first child. They looked at empty new homes and foreclosures, but they wanted the newness and the security of warranties that they wouldn't get with a foreclosure.

"We just kind of want to do our own thing from the ground up," said Nelson, 27, a caterer who owns a coffee shop and supermarket, among other businesses. He and his wife, an interior designer, are renting their townhouse in Hugo and plan to move into their new house in September.

Their new four-bedroom home had a base price of $295,000, but they made several upgrades. Ryland covered the Nelsons' closing costs and threw in free in-home surround sound -- a "really nice feature," Nelson said.

Pulte Group, another home builder, has been doing some shopping of its own.

Marv McDaris, division president, said Pulte has been buying finished lots and even raw land in upscale areas such as Chanhassen, Shakopee and Maple Grove. In March it opened a new 70-lot development next to Wayzata High School called Elm Creek Highlands and has already sold 13 homes in the $400,000 range, he said. Pulte is seeking approval to develop an additional 77 lots adjacent to it.

"There is demand out there," he said.

Jon Aune, director of land operations for Lennar Corp.'s Minnesota division, went back to an old metaphor to describe what's happening in the new home market.

"I used to say we were in a dark tunnel," Aune said. "Now we're in a dark tunnel but there appears to be a light at the end of it."

jbuchta@startribune.com • 612-473-7376 jennifer.bjorhus@startribune.com • 612-673-4683