“After an agonizingly-slow start to 2014, home sales and new home construction now finally appear to be back on track.”

The Wells Fargo Securities Economics Group throws a few drops of cold water onto the exuberance some analysts have expressed over the May housing numbers. In the Group’s Housing Data Wrap-Up: June 2014 they note that while the increase in new home sales of 18.6% nationally in May was dramatic, the pace of new home sales and starts had both trailed last year’s figures until that month.

The report attempts to temper the optimism May’s increase has created by noting that the fundamentals underlying the market have not experienced significant improvement and the prior months were below the levels typically expected. However, the Group also noted some optimistic signs for the future.

Even if May’s gains were exaggerated, home buyers still appear to have a little more spring in their step as the drag from last spring’s spike in mortgage rates continues to fade away and job growth and consumer confidence continue to improve…Early indications for June suggest that demand for new and existing homes strengthened further…The improvement in sales activity combined with stronger job and income growth suggests the housing recovery is back on track…The acceleration in job growth and the decline in the unemployment rate should boost household formations in coming years, providing a lift to demand for both apartments and single-family homes.

But, again, that optimism was tempered.

Even with the recent stronger data, the housing recovery remains well short of where it was expected to be.

The Group has reduced its original forecasts for new home sales and starts this year by double digits. They noted that their forecasts for sales and starts were one of the lowest of any out there and yet conditions so far this year have caused them to even draw those back. But they do note that some of the fundamentals are improving though not enough to spark a spectacular improvement.

Most notably, job growth has improved and, with layoffs near cycle lows and the unemployment rate near 6 percent, worries about job security have subsided and consumer confidence has increased. The shock from last year’s spike in mortgage rates has also subsided, although mortgage rates are still about a percentage point above where they were prior to the spike that occurred late last spring. The improved economic picture should pull home sales and new home construction modestly higher over the next few months. A dramatic improvement, however, does not appear to be in the cards.

Many homeowners are still upside-down on their mortgages, the report notes, which, along with those with only nominal equity, hinder the creation of move-up buyers.

We continue to look for an extremely gradual recovery in housing demand. Some of the percentage gains, most notably in new homes, appear large but are coming off historically low bases.

The Wells Fargo Securities Economics Group is now forecasting an increase of 11.9% in new home sales and starts to increase 8.5% this year.