Home sales "may be stabilizing" due to lower house prices and mortgage rates, according to Federal Reserve Board Chairman Ben Bernanke, but he says he still expects a further reduction in new construction to bring the large inventory of unsold homes back to normal levels.Single-family starts are down 35% since the peak earlier this year. But builders are carrying an inventory of 555,000 unsold homes, which is 57% above the 10-year average. The Fed chairman said this 6.4-month supply of newly constructed homes probably understates the inventory due to a sharp rise in the number of buyers that have canceled sales contracts, which do not show up in official estimates. In addition, there are 3.3 million previously owned single-family homes on the market, which is equal to a 7.2-month supply at the current sales pace. To reduce this inventory overhang, builders are likely to make "further adjustments in the production," Mr. Bernanke said. "The slowing pace of residential construction is likely to be a drag on economic growth into the next year."

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