The best number out of today’s report on sales of newly built homes is not the 7.3 percent bump up in signed contracts, it’s the drop in inventories to a 6.5 month supply.

That number is based on a quicker sales pace and a drop of 5000 in the absolute number of newly built homes on the market.

That volume is the lowest since at least 1963, according to Miller Tabak’s Peter Boockvar, who worries that the supply of existing homes is still simply too much for anyone to be touting the builders.

“The best response on the part of builders is to shoot themselves in the foot for as long as they can financially stand, so the market can more quickly absorb the excess inventory of existing homes which make up most of the overall market,” writes Boockvar.

Aristar’s JT Smith chimes in on the actual April sales number: “Unadjusted sales of 32k makes April 2011 tied for the worst April sales number in recorded history.”

My concern is not over the inventory of newly built homes. I think it’s a big positive. My problem is the glut of bargain-priced REO (bank owned) homes against which the builders compete.

Check out a chart we re-made from data by the Calculated Risk Blog.

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Despite the lowest interest rate on the 30 year fixed in six months, mortgage applications to purchase a new home fell last week, over 3 percent. In fact, purchase application volume has been falling, on average, for the past four weeks, which is particularly troubling in this, the supposedly busiest season of the year for home buying.

So what’s going on?

I’m not going to boil it down to some generalization that there is no demand for housing out there, and everyone’s afraid of falling prices. There is demand. Homes are selling. But an historically high number of these purchases are to all-cash buyers, because the mortgage market is just so tight. Fannie, Freddie and FHA rule the roost, and their new rules and fees are pricing some buyers out while disqualifying many more.

Don’t get me wrong, I’m all for stricter underwriting, given the brutal effects of the opposite. I do, however, believe that as government tries to shut the door on Fannie and Freddie, it must open the door to private mortgage investors.

That’s why I was particularly interested to see the testimony today from the CEO of the only player in the private label game. Redwood Trust President and CEO Martin Hughes boiled the situation down pretty clearly.

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